TREASURY LAWS AMENDMENT (MAKING MULTINATIONALS PAY THEIR FAIR SHARE-INTEGRITY AND TRANSPARENCY) BILL 2023 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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TREASURY LAWS AMENDMENT (MAKING MULTINATIONALS PAY THEIR FAIR SHARE-INTEGRITY AND TRANSPARENCY) BILL 2023

2022-2023 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES TREASURY LAWS AMENDMENT (MAKING MULTINATIONALS PAY THEIR FAIR SHARE--INTEGRITY AND TRANSPARENCY) BILL 2023 EXPLANATORY MEMORANDUM (Circulated by authority of the Assistant Minister for Competition, Charities and Treasury, the Hon Dr Andrew Leigh MP)

Table of Contents Glossary................................................................................................. iii General outline and financial impact ...................................................... 1 Chapter 1: Multinational tax transparency--disclosure of subsidiaries .................................................................. 5 Chapter 2: Thin capitalisation ........................................................ 9 Chapter 3: Statement of Compatibility with Human Rights .......... 41 Attachment 1: Impact Analysis for Schedule 1 ................................. 45 Attachment 2: Impact Analysis for Schedule 2 ................................. 71

Glossary This Explanatory Memorandum uses the following abbreviations and acronyms. Abbreviation Definition ACA Allocable cost amount ADI Authorised deposit-taking institution ATO Australian Taxation Office BEPS Base erosion and profit shifting Bill Treasury Laws Amendment (Making Multinationals Pay Their Fair Share-- Integrity and Transparency) Bill 2023 BCT Business continuity test CGT Capital gains tax Commissioner Commissioner of Taxation Corporations Act Corporations Act 2001 COT Continuity of ownership test EBITDA Earnings before interest, taxes, depreciation, and amortisation EU European Union GR Group ratio ITAA 1936 Income Tax Assessment Act 1936 ITAA 1997 Income Tax Assessment Act 1997 MNE Multinational enterprise OECD Organisation for Economic Cooperation and Development

Glossary Abbreviation Definition OECD's best practice guidance OECD report on Limiting Base Erosion Involving Interest Deductions and Other Financial Payments Action 4 - 2016 Update TAA 1953 Taxation Administration Act 1953 TC control interest Thin capitalisation control interest iv

General outline and financial impact Schedule 1 - Multinational tax transparency-- disclosure of subsidiaries Outline Schedule 1 to the Bill introduces new rules on the disclosure of information about subsidiaries. For financial years commencing on or after 1 July 2023, Australian public companies (listed and unlisted) must disclose information about subsidiaries in their annual financial reports. Date of effect Schedule 1 to the Bill will commence the day after Royal Assent. The amendments apply to annual financial reports prepared for financial years commencing on or after 1 July 2023. Proposal announced Schedule 1 to the Bill partially implements the Government election commitment on multinational tax integrity, as well as the 'Multinational Tax Integrity Package - improved tax transparency' measure from the October 2022-23 Budget. Financial impact This measure is estimated to have an unquantifiable impact on receipts. Human rights implications Schedule 1 to the Bill does not raise human rights issues. See Statement of Compatibility with Human Rights -- Chapter 3. Impact Analysis The Impact Analysis relating to the amendments in Schedule 1 to the Bill is at Attachment 1. This Impact Analysis also considers the Government's country-by- country reporting 2022-23 Budget measure. Compliance cost impact The measure is estimated to have a minor impact on compliance costs. 1

General outline and financial impact Schedule 2 - Thin capitalisation Outline Schedule 2 to the Bill limits the amount of debt deductions multinational entities can claim in an income year. The new thin capitalisation rules seek to align with the OECD's earnings-based best practice model which allows an entity to deduct net interest expense up to a benchmark earnings ratio. Date of effect Schedule 2 to the Bill will commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent. The amendments apply to income years beginning on or after 1 July 2023. Proposal announced Schedule 2 to the Bill implements the MNE interest limitation rules from the Government election commitment on multinational tax integrity, as well as the 'Multinational Tax Integrity Package - amending Australia's interest limitation (thin capitalisation) rules' measure from the October 2022-23 Budget. Financial impact Schedule 2 has the following estimated revenue implications: All figures in this table represent amounts in $m. 2023-24 2024-25 2025-26 - 370.0 350.0 - denotes nil Human rights implications Schedule 2 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights -- Chapter 3. Impact analysis The Impact Analysis relating to the amendments in Schedule 2 to the Bill is at Attachment 2. This Impact Analysis also considers the Government's 2022-23 Budget measure to deny deductions relating to intangibles connected with low- or no-tax jurisdictions. 2

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Main points • International profit shifting by multinationals erodes the domestic and corporate tax base and limits Government revenue. • Strengthening Australia's thin capitalisation rules will combat multinational profit shifting and tax avoidance by ensuring that debt (interest) deductions are linked to an entity's economic activity and taxable income in Australia. • The amended thin capitalisation rules will limit an entity's debt deductions to 30 per cent of its tax EBITDA. Two alternative thin capitalisation tests are available for entities which are more highly leveraged for non-tax reasons. • This is expected to raise revenue and to limit the ability of multinationals to use debt and associated interest deductions as a BEPS technique. • The thin capitalisation rules are intended to target multinational enterprises and large businesses. There are approximately 2,500 taxpayers with sufficient levels of debt deductions to fall within scope of the new law and who are likely to seek legal and tax advice on the impacts of the new law. Compliance cost impact This measure has an estimated compliance cost impact of $70.1 million for the initial year of effect, followed by nil ongoing costs. 3

Chapter 1: Multinational tax transparency--disclosure of subsidiaries Table of Contents: Outline of chapter .................................................................................. 5 Context of amendments ......................................................................... 5 Summary of new law.............................................................................. 6 Detailed explanation of new law ............................................................ 6 Commencement, application, and transitional provisions ...................... 8 Outline of chapter 1.1 Schedule 1 to the Bill introduces new rules on the disclosure of information about subsidiaries. For financial years commencing on or after 1 July 2023, Australian public companies (listed and unlisted) must disclose information about subsidiaries in their annual financial reports. 1.2 Legislative references in this Chapter are made to the Corporations Act unless otherwise specified. Context of amendments 1.3 There are shifts globally towards public reporting as a means of enhancing public scrutiny of multinational tax arrangements. This amendment is part of the Government's broader regulatory mix to improve corporate disclosures. Ensuring this information is in the public domain will facilitate an informed discussion on tax compliance, helping to build trust in the integrity of the tax system. 1.4 Australian public companies (listed and unlisted) will be required to disclose information on their subsidiaries. This measure will place an onus on companies to be more transparent about their corporate structures. Disclosures 5

Multinational tax transparency--disclosure of subsidiaries would be made publicly available within the company's annual financial report published on their website to minimise compliance burden. 1.5 The intent is that increased public disclosures will lead to enhanced scrutiny on companies' arrangements, including how they structure their subsidiaries and operate in different jurisdictions, including for tax purposes. From a tax perspective, the expectation is that more information in the public domain will help to encourage behavioural change in terms of how companies view their tax obligations, including their approach to tax governance practices, decision making around aggressive tax planning strategies and potential simplification of group structures. 1.6 The reporting of a company's subsidiary information would be in line with international approaches to enhanced corporate tax transparency, such as that of the UK. Based on stakeholder feedback from the recent consultation process, this would also provide a more objective mechanism for disclosing information on a company's tax arrangements. Requiring public companies to disclose their subsidiaries information would also align with the Government's commitment to implement a beneficial ownership register. Summary of new law 1.7 For each financial year commencing on or after 1 July 2023, Australian public companies must, as part of their annual financial reporting obligations under Chapter 2M, provide a 'consolidated entity disclosure statement': • If the accounting standards require the public company to prepare financial statements in relation to a consolidated entity - the 'consolidated entity disclosure statement' is a statement that includes disclosures about entities within the consolidated entity at the end of the financial year. • If the above does not apply - the 'consolidated entity disclosure statement' is a statement that to that effect. 1.8 Alongside the general reporting obligations, directors, chief executive officers and chief financial officers must also declare that the consolidated entity disclosure statement is in their opinion 'true and correct' at the end of that financial year. Detailed explanation of new law 1.9 Under the current law, paragraph 292(1)(b) provides that public companies must prepare financial reports each financial year. In addition to public companies, a range of other bodies, including disclosing entities, large proprietary companies and registered schemes must also prepare annual 6

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 financial reports. Those other bodies are outside of the scope of these amendments. To avoid doubt, public companies that do not report under Chapter 2M are also outside the scope of these amendments (for example, charities that report annually to the Australian Charities and Not-for-profits Commission rather than under Chapter 2M). 1.10 Section 295 provides for the contents of annual financial reports. Subsection 295(1) provides for this in three broad categories. Further details for each category are provided for in subsections 295(2), (3) and (4). The amendments require Australian public companies to, as part of their annual financial reporting obligations, disclose additional information in a 'consolidated entity disclosure statement'. [Schedule 1, item 1, paragraph 295(1)(ba)] 1.11 The term 'public company' is defined in section 9, which is generally a company other than a proprietary company or a corporate collective investment vehicle. 1.12 Currently, subsection 295(2) requires entities to prepare financial statements differently, depending on whether the accounting standards require them to prepare financial statements in relation to a consolidated entity. 1.13 Under the amendments, if the accounting standards require the public company to prepare financial statements in relation to a consolidated entity, the 'consolidated entity disclosure statement' (to be included as part of the company's annual financial reports) must provide the following information in relation to entities within the consolidated entity: • the names of each entity at the end of the financial year; • whether the entity was a body corporate, partnership or trust at the end of the financial year; • whether at the end of the financial year, the entity was any of the following: - a trustee of a trust within the consolidated entity, - a partner in a partnership within the consolidated entity; - a participant in a joint venture within the consolidated entity; • if the entity is a body corporate, where the entity was incorporated or formed; • if the entity is a body corporate, the public company's percentage ownership (whether directly or indirectly) of each of those entities that are body corporates at the end of the financial year; and • the tax residency of each of those entities during the financial year. [Schedule 1, item 2, paragraph 295(3A)(a)] 7

Multinational tax transparency--disclosure of subsidiaries If, however, paragraph 295(3A)(a) does not apply, being that the accounting standards do not require the public company to prepare financial statements in relation to a consolidated entity, the public company's annual financial report must include a statement to that effect. This statement is the 'consolidated entity disclosure statement' for such a company. [Schedule 1, item 2, paragraph 295(3A)(b)] 1.14 Under the amendments, the accounting standards refer to those made by the Australian Accounting Standards Board (under section 334). At the time these explanatory materials were prepared, Accounting Standard AASB 10 relates to consolidated financial statements. These accounting standards are publicly available at: https://aasb.gov.au/pronouncements/accounting-standards/ Directors, chief executive officers and chief financial officers must also declare that the consolidated entity disclosure statement is in their opinion 'true and correct' at the end of that financial year. [Schedule 1, items 3 and 4, paragraphs 295(4)(da) and 295A(2)(ca)] 1.15 The standard of 'true and correct' is distinct from the generally used standard of 'true and fair' with respect to an entity's financial statements and notes to financial statements (see section 297 regarding annual financial reports). Under the current law, the 'true and fair' view generally applies with respect to the financial position or performance of the reporting entity. 1.16 As 'true and correct' is not defined in the legislation, the words take on their ordinary meaning in the context of the amendments. For the purposes of the consolidated entity disclosure statement, the policy intention is to ensure complete and accurate disclosures under subsection 295(3A). 1.17 Further, as the consolidated entity disclosure statement forms part of an entity's annual financial report, it is also subject to the existing audit framework under the Corporations Act. Specifically, section 307 requires an auditor to form an opinion about whether the financial report (which includes the consolidated entity disclosure statement) is in accordance with the Corporations Act generally, as well as on specific matters. This general obligation is also consistent with the requirements of the auditor's report under section 308. Commencement, application, and transitional provisions 1.18 The amendments apply to annual financial statements prepared by public companies for each financial year commencing on or after 1 July 2023. [Schedule 1, item 5, section 1702] 8

Chapter 2: Thin capitalisation Table of Contents: Outline of chapter .................................................................................. 9 Context of amendments ....................................................................... 10 Summary of new law............................................................................ 11 Comparison of key features of new law and current law ...................... 12 Detailed explanation of new law .......................................................... 13 New 'general class investor' definition........................................... 13 Definition of 'financial entity' .......................................................... 14 New thin capitalisation tests .......................................................... 15 Consequential amendments ................................................................ 37 Commencement and application provisions ........................................ 40 Outline of chapter 2.1 Schedule 3 to the Bill strengthens the thin capitalisation rules in Division 820 of the ITAA 1997. The amendments address risks to the domestic tax base arising from the excessive use of debt deductions, which amount to base erosion or profit shifting arrangements. The amendments introduce new thin capitalisation earnings-based tests for a certain class of entities, replacing the existing asset-based rules for those entities. The amendments also establish a new arm's length debt test, in the form of a third party debt test. 2.2 Schedule 3 introduces new Subdivision 820 EAA - debt deduction creation rules. These rules disallow deductions to the extent that they are incurred in relation to debt creation schemes. 2.3 All legislative references in this Schedule are to the ITAA 1997 unless otherwise specified. 2.4 The amendments apply to income years commencing on or after 1 July 2023. 9

Thin capitalisation Context of amendments 2.5 Excessive interest deductions (or debt deductions) pose a significant risk to Australia's domestic tax base. 2.6 The OECD's BEPS project outlines the problem of using third party, related party, and intragroup debt to generate excessive deductions for interest and other financial payments.1 In particular, the OECD notes that "the use of third party and related party interest is perhaps one of the simplest of the profit- shifting techniques available in international tax planning. The fluidity and fungibility of money makes it a relatively simple exercise to adjust the mix of debt and equity in a controlled entity." 2.7 In the 2022-23 October Budget, the Government announced that they will strengthen Australia's thin capitalisation rules to address risks to the domestic tax base arising from the use of excessive debt deductions. The Government's Budget announcement was informed by the OECD's best practice guidance. The measure will apply to income years commencing on or after 1 July 2023. 2.8 The thin capitalisation regime is Australia's current approach to limiting debt deductions. The rules were designed to limit the debt deductions that an entity can claim for tax purposes based on the amount of debt used to finance its operations compared with its level of equity, by restricting the amount of debt deductions a company can have based on its level of assets. 2.9 This approach indirectly limits the amount of debt an entity can use to generate allowable interest deductions. The OECD best practice sets out a direct approach to limit the interest expenses an entity can claim. 2.10 For certain entities (namely, general class investors), the amendments replace the existing asset-based rules with earnings-based rules which are in line with those recommended in the OECD best practice guidance. In addition, financial entities (non-ADI) will be subject to the new third party debt test in place of the former arm's length debt test. Financial entities and ADIs will otherwise continue to be subject to their existing asset-based debt deduction safe harbour and worldwide gearing tests. This is because the OECD recognises that the earnings-based tests are unlikely to be effective for these types of entities, partly as they are net lenders and subject to regulatory capital rules. 2.11 The introduction of the fixed ratio and group ratio rules align with the OECD best practice guidance, which recommends limiting an entity's deductions for net interest, and payments economically equivalent to interest, to a percentage of the entity's EBITDA. This reflects the view that aligning debt deductions with taxable economic activity is a more robust approach to address base erosion and profit shifting. 1OECD report on Limiting Base Erosion Involving Interest Deductions and Other Financial Payments Action 4 - 2016 Update 10

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 2.12 The earnings-based tests are supplemented by a third party debt test, which allows debt deductions to be deducted where those expenses are attributable to genuine third party debt which is used to fund Australian business operations. That is, deductions for related party debt will be entirely disallowed under this test. The third party debt test replaces the existing arm's length debt test for 'general class investors' and financial entities (non-ADI), as announced in the October 2022-23 Budget. Summary of new law 2.13 Schedule 2 introduces new earnings-based tests for 'general class investors', specifically, a fixed ratio test replaces the existing safe harbour test, and a group ratio test that replaces the existing worldwide gearing test. In addition, Schedule 2 introduces a third party debt test for general class investors and financial entities that are not ADIs. The new rules may disallow all or part of a general class investor's debt deductions for an income year. 2.14 Schedule 2 also introduces new Subdivision 820-EAA - debt deduction creation rules. These rules disallow debt deductions to the extent that they are incurred in relation to debt creation schemes. 2.15 The 'general class investor' concept represents a consolidation of the existing 'general' classes of entities, being 'outward investor (general)', 'inward investment vehicle (general)' and 'inward investor (general)'. Entities which previously fell into one of those classes of entities will now fall under the new 'general class investor' definition. This approach simplifies elements of the thin capitalisation regime, while being clear that financial entities and ADIs are not within the scope of that concept. Fixed ratio test 2.16 The fixed ratio test allows an entity to claim net debt deductions up to 30 per cent of its 'tax EBITDA', which is broadly, the entity's taxable income or tax loss adding back deductions for interest, decline in value, and capital works. This is a relatively straightforward rule to apply and ensures that an entity's debt deductions are directly linked to its economic activity. It also directly links these deductions to an entity's taxable income, which makes the rule more robust against tax planning. 2.17 Under the fixed ratio test, a special deduction is allowed for debt deductions that were previously disallowed under the fixed ratio test if the entity's net debt deductions are less than 30 per cent of its 'tax EBITDA' for an income year. Debt deductions disallowed over the previous 15 years can be claimed under this special deduction rule, subject to certain conditions. 11

Thin capitalisation 2.18 The special deduction is included as part of the fixed ratio test to address year- on-year earnings volatility concerns for businesses which can limit their ability to claim debt deductions depending on their economic performance for an income year. Group ratio test 2.19 The group ratio test can be used as an alternative to the fixed ratio test. The group ratio test allows an entity in a sufficiently highly leveraged group to deduct net debt deductions in excess of the amount permitted under the fixed ratio rule, based on a ratio that relies on the group's financial statement. 2.20 If the group ratio test applies, the amount of debt deductions of an entity for an income year that are disallowed is the amount by which the entity's net debt deductions exceed the entity's group ratio earnings limit for the income year. Third party debt test 2.21 The third party debt test allows all debt deductions which are attributable to third party debt and that satisfy certain other conditions. This test replaces the arm's length debt test. Comparison of key features of new law and current law Table 2.1 Comparison of new law and current law New law Current law The 'general class investor' definition is General class investors are either an introduced. The definition is a 'outward investor (general)', 'inward consolidation of the previous general investment vehicle (general)' or 'inward classes of entities. investor (general)'. Earnings-based tests (being the fixed ratio The thin capitalisation rules disallow an test and the group ratio test) disallow an amount of an entity's debt deductions by amount of an entity's debt deductions based reference to the quantum of debt held by the on the entity's earnings or profits. entity relative to its assets. A fixed ratio test disallows net debt No direct equivalent. deductions that exceed a specified Under the safe harbour debt test, debt proportion (30 per cent) of tax EBITDA. deductions in excess of 60 per cent of the The fixed ratio test replaces the safe average value of the entity's Australian harbour debt test for all general class assets are disallowed. investors. 12

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 New law Current law A special deduction is allowed in an No equivalent. income year for debt deductions disallowed under the fixed ratio test over the previous 15 years to the extent that the fixed ratio earnings limit (30 per cent of tax EBITDA) of the entity exceeds the entity's net debt deductions for the income year. As an alternative to the fixed ratio test, the No direct equivalent. group ratio test disallows debt deductions The worldwide gearing debt test allows an to the extent that the entity's net debt entity's Australian operations to be geared deductions exceed the group ratio earnings up to 100 per cent of the gearing of the limit for the income year. worldwide group to which the Australian The group ratio test replaces the worldwide entity belongs. gearing debt test for all general class investors. The third party debt test disallows all debt The arm's length debt test allows debt deductions which are not attributable to deductions up to the lower of the debt the third party debt or do not satisfy certain notional Australian business would other conditions. This test replaces the reasonably be expected to have borrowed, arm's length debt test. and the amount of debt a commercial independent lender would reasonably be expected to have provided. New Subdivision 820 EAA - debt No equivalent. deduction creation rules - disallows debt deductions to the extent that they are incurred in relation to debt creation schemes. Detailed explanation of new law New 'general class investor' definition 2.22 Schedule 2 to the Bill introduces new thin capitalisation tests for 'general class investors'. Entities which are general class investors must apply one of the new thin capitalisation tests. The new tests are the fixed ratio test, the group ratio test, and the third party debt test. Entities which are not general class investors will continue to be subject to the existing thin capitalisation tests, with the exception of the arm's length debt test. 2.23 'General class investor' is a new concept introduced by Schedule 2. The concept represents a consolidation of the existing 'general' classes of entities, 13

Thin capitalisation being 'outward investor (general)', 'inward investment vehicle (general)' and 'inward investor (general)'. Entities which previously fell into one of those classes are now intended to fall under the new 'general class investor' definition. 2.24 An entity is a 'general class investor' for an income year provided: • it is not, for all the year, a financial entity or an ADI that is either an outward or inward investing entity; and • on the assumption that the entity was a financial entity, it would be either an outward or inward investing financial entity that is not an ADI for the income year. [Schedule 2, item 29 and 126, sections 820-46 and subsection 995-1(1)] 2.25 The general effect of the definition of 'general class investor' is that the following entities, which are not financial entities or ADIs, will be general class investors: • an Australian entity that carries on a business in a foreign country at or through a permanent establishment or through an entity that it controls; • an Australian entity that is controlled by foreign residents; and • a foreign entity having investments in Australia. 2.26 Entities which are financial entities or ADIs for all an income year will need to consider if they fall under one of the other classes of entities. 2.27 An entity will effectively need to be a financial entity or an ADI for an entire income year to be precluded from being a general class investor for the income year. This is because the existing asset-based rules that apply to entities which are not general class investors are generally more favourable than the rules which apply to general class investors. Definition of 'financial entity' 2.28 Schedule 2 strengthens paragraph (a) of the definition of 'financial entity' in subsection 995-1(1) by adding two additional conditions to that part of the definition. Current paragraph (a) of the definition of 'financial entity' provides that "financial entity, at a particular time, means an entity other than an ADI that is ... a registered corporation under the Financial Sector (Collection of Data) Act 2001 ... ". This is a broad definition that is used for different policy reasons regarding the collection of financial data. Non-ADI corporations may register even though the financial transactions relating to which they register are relatively minor when compared to their other business activities. Given the changes in 2018 to broaden the definition, an increasing number of entities are now claiming to be financial entities for tax purposes. 14

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 2.29 'Financial entities' and ADIs continue to have access to the existing thin capitalisation tests (with the exception of the arm's length debt test for financial entities, which is being replaced by the third party debt test). The existing asset-based tests are generally more favourable to taxpayers than the new earnings-based tests which only apply to general class investors. This has given rise to integrity concerns regarding whether entities which satisfy current paragraph (a) should genuinely be considered financial entities for income tax purposes, with access to the generally more favourable taxation treatment. 2.30 The additional conditions under paragraph (a) include requirements for the entity to be carrying on a business of providing finance but not predominantly for the purposes of providing finance directly or indirectly to or on behalf of the entity's associates. The entity must also derive all, or substantially all, of its profits from that business. The term 'all, or substantially all' is adopted to cover circumstances where all of the entity's profits are derived from that business but accommodating other minor or incidental profits. The additional requirements are an integrity measure to ensure the thin capitalisation rules are fit for purpose and that the amendments to introduce the new earnings-based rules are not undermined. [Schedule 2, items 124 and 125, subsection 995-1(1)] New thin capitalisation tests Application of the new tests 2.31 The new thin capitalisation rules may disallow all or part of a general class investor's debt deductions for an income year. The amount of debt deductions disallowed (if any) is determined through the application of one of the new thin capitalisation tests. The new tests are the fixed ratio test, the group ratio test, and the third party debt test. An entity chooses which test to apply for all of its debt deductions for an income year. [Schedule 2, item 29, section 820-46] Application of the fixed ratio test 2.32 The fixed ratio test is the default test that applies for general class investors that do not make a choice to use either the group ratio test or the third party debt test. [Schedule 2, item 29, section 820-46] Application of the group ratio test 2.33 The group ratio test requires an entity to determine the ratio of its group's net third party interest expense to the group's EBITDA for an income year. 15

Thin capitalisation Therefore, the group ratio test is only available if the entity is a member of a relevant group. 2.34 Specifically, a general class investor can only choose to use the group ratio test if it is a member of a 'GR group' and the 'GR group EBITDA' for the period is at least zero. A 'GR group', for a period, is the group comprised of the relevant worldwide parent entity or a global parent entity and each other entity that is fully consolidated on a line-by-line basis in the relevant financial statements. The definition of GR group parent ensures that offshore and domestic parent entities can access the group ratio test. [Schedule 2, items 29 and 124, section 820-46 and subsection 995-1(1)] 2.35 A 'GR group' cannot be comprised of just one entity. [Schedule 2, item 29, subsection 820-53(2)] 2.36 The worldwide parent or global parent entity is referred to as the 'GR group parent' and must have financial statements that are audited consolidated financial statements for the period. Where a GR group has a global parent entity, the equivalent global financial statements must be prepared for the period. Each entity that is fully consolidated on a line-by-line basis in the GR group parent's financial statements is referred to as a 'GR group member'. [Schedule 2, item 29 and 126, subsections 820-53(2)-(5) and 995-1(1)] 2.37 The reliance on accounting concepts is intended to minimise compliance costs, as the calculation of the GR ratio will be based on figures that are already required to be calculated as part of the worldwide or global parent's consolidated financial reports, similar to the current process of calculating worldwide debt under the asset-based rules. 2.38 The GR group EBITDA is relevant to calculating the group ratio earnings limit, which is discussed below from paragraph 2.72. The requirement for the GR group EBITDA to be at least zero is necessary to ensure the meaningful application of the group ratio test and prevent entities from exploiting its operation to claim excessive debt deductions that are not linked to their profits. This is consistent with the OECD best practice guidance. Application of the third party debt test 2.39 General class investors may choose to apply the third party debt test in relation to an income year. [Schedule 2, item 29, section 820-46] 2.40 General class investors are deemed to have made a choice to use the third party debt test if certain conditions are satisfied. This is intended to prevent a group of related entities from choosing different thin capitalisation tests for the purposes of maximising their tax benefits under each test. 2.41 Broadly, if the entity that issues a debt interest chooses to use the third party debt test, then their associate entities in the obligor group in relation to the debt interest are all deemed to have chosen that test. Additionally, entities that have 16

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 entered into a cross staple arrangement together are also deemed to have chosen the third party debt test if one of those entities chooses to use that test. [Schedule 2, item 29, sections 820-48] 2.42 The obligor group is a new concept introduced by Schedule 2. An entity is a member of an obligor group in relation to a debt interest if the creditor of that debt interest has recourse for payment of the debt to the assets of the entity. The borrower in relation to the debt interest is also a member of the obligor group. A reference to 'entity' in 820-48 and 820-49 is intended to capture all members of consolidated groups and multiple entry consolidated groups. [Schedule 2, items 29, 131 and 133, section 820-49 and subsection 995-1(1)] 2.43 A modified definition of 'associate entity' applies for the purposes of the choice deeming rule. In determining whether an entity is an associate entity of another entity, the reference in paragraphs 820-905(1)(a) and 820-905(2A)(a) of the Act to "an *associate interest of 50% or more" is instead treated as being a reference to "a *TC control interest of 20% or more". 'TC control interest' is defined in 820-815 and its meaning is affected by sections 820-820 to 820-835. [Schedule 2, item 29, subsection 820-48(2)] 2.44 The modified definition of 'associate entity' strengthens the existing definition and helps ensure that entities cannot structure their affairs in a manner which avoids the application of the definition and, by extension, the restrictions placed on making a choice to use the third party debt test. Procedure of choices 2.45 A choice for an income year to use either the group ratio test or the third party debt test must be made: • in the approved form; and • on or before the earlier of the day the entity lodges its income tax return for the income year and the day the entity is required to lodge its income tax return for the income year. [Schedule 2, item 29, subsections 820-47(1)-(2)] 2.46 The Commissioner may allow a later time for the choice to be made. [Schedule 2, item 29, paragraph 820-47(2)(b)] 2.47 The Commissioner may defer the time within which an approved form is required to be given (see section 388-55 in Schedule 2 to the TAA 1953). 2.48 A choice for an income year cannot be revoked, unless the Commissioner is satisfied of certain matters and allows the entity to revoke its choice. [Schedule 2, item 29, subsections 820-47(3)-(4)] 2.49 The entity that has made a choice (other than a choice that is taken to have made under 820-46(5)) may subsequently apply to the Commissioner, in the approved form, to revoke the choice where the Commissioner is satisfied it is 17

Thin capitalisation fair and reasonable to do so. In deciding whether to revoke a general class investor's choice, the Commissioner must be satisfied that at the time the entity made the choice it was reasonable to believe that the chosen test allowed for a higher earnings limit for the entity than the fixed ratio test. This is intended to be an objective requirement and ensures that taxpayers cannot unreasonably seek to apply a particular test to maximise their debt deductions but still allow for, in certain circumstances, the ability to default into the fixed ratio test. [Schedule 2, item 29, subsections 820-47(6)-(7)] 2.50 If an entity revokes their choice, then the entity is taken to have never made the choice. This has the effect that choices previously taken to have been made under 820-46(5) are instead taken to have never been made. [Schedule 2, item 29, subsections 820-47(5)] Operation of the new tests 2.51 The amount of debt deductions of an entity for an income year that is disallowed is the amount by which the entity's: • if the default fixed ratio test applies - net debt deductions exceed the entity's 'fixed ratio earnings limit' for the income year; or • if the entity has made a choice to use the group ratio test for the income year - net debt deductions exceed the entity's 'group ratio earnings limit' for the income year; or • if the entity has made a choice to use the third party debt test for the income year - debt deductions exceed the entity's 'third party earnings limit' for the income year. [Schedule 2, item 29, sections 820-45, 820-46 and 820-50)] 2.52 This approach to disallowing debt deductions is consistent with the OECD best practice guidance in relation to the fixed and group ratio tests. The 'earnings limit' is the absolute cap on the net debt deductions that an entity is entitled to deduct. Debt deductions are denied by the amount by which net debt deductions exceed the relevant earnings limit. 2.53 It is important to note that, contrary to the fixed and group ratio tests, the third party debt test denies debt deductions by the amount by which debt deductions (not net debt deductions) exceeds the relevant earnings limit. This approach is taken to ensure that test achieves its policy of effectively denying all debt deductions which are attributable to related party debt. 2.54 If one of the new tests operates to disallow all or part of an entity's debt deductions, then each individual debt deduction is disallowed in the same proportion. This approach is broadly consistent with the existing thin capitalisation rules and ensures that entities cannot choose to disallow certain debt deductions in preference to others. 18

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Operation of the fixed ratio test 2.55 The fixed ratio test disallows debt deductions to the extent that net debt deductions exceed a specified proportion (30 per cent) of tax EBITDA. This is a relatively straightforward rule to apply and ensures that an entity's debt deductions are directly linked to its economic activity. It also directly links these deductions to an entity's taxable income. 2.56 If the fixed ratio test applies, the amount of debt deductions of an entity for an income year that is disallowed is the amount by which the entity's net debt deductions exceed the entity's fixed ratio earnings limit for the income year. [Schedule 2, item 29, section 820-50] 2.57 An entity's 'fixed ratio earnings limit' for an income year is 30 per cent of its tax EBITDA for that income year. [Schedule 2, item 29 and 126, section 820-51 and subsection 995-1(1)] Tax EBITDA 2.58 An entity's 'tax EBITDA' for an income year is worked out according to the following steps: • Step 1: Work out the entity's taxable income or tax loss for the income year (disregarding the operation of the thin capitalisation rules and treating a tax loss as a negative amount). • Step 2: Add the entity's 'net debt deductions' for the income year. • Step 3: Add the sum of the entity's decline in value and capital works deductions (if any) for the income year. • Subject to Step 4, the result of Step 3 is the entity's tax EBITDA for the income year. • Step 4: If the result of Step 3 is less than zero, treat it as being zero. [Schedule 2, item 29 and 141, section 820-52 and subsection 995- 1(1)] 2.59 These steps allow for an entity's tax EBITDA to be calculated according to concepts from Australia's income tax system. 2.60 Adjustment to an entity's tax EBITDA may also need to be made in accordance with the regulations. Australia's income tax system is complex. Accordingly, a regulation making power is appropriate to ensure the tax EBITDA calculation can be readily updated should further adjustments be desirable. [Schedule 2, item 29, paragraph 820-52(1)(d)] 2.61 In calculating tax EBITDA, all entity types must disregard amounts that are included in their assessable income under Division 207 (concerning franked distributions). Without this adjustment, franking credit amounts would increase 19

Thin capitalisation an entity's tax EBITDA despite no tax being paid on those amounts. Similarly, dividends that are included in an entity's assessable income under section 44 of the ITAA 1936 are excluded from the entity's tax EBITDA. This avoids double counting income as the dividend represents profits which have already been taxed at the company level and are referable to the company's tax EBITDA. [Schedule 2, item 29, section 820-52] 2.62 An entity's 'net debt deductions' for an income year is worked out according to the following steps: • Step 1: Work out the sum of the entity's debt deductions for the income year. • Step 2: Work out the sum of each amount included in the entity's assessable income for that year that is: - interest, an amount in the nature of interest, or any other amount economically equivalent to interest; or - any amount directly incurred by another entity in obtaining or maintaining the financial benefits received by the other entity under a scheme giving rise to a debt interest; or - any other expense that is incurred by another entity and that is specified in the regulations. • Step 3: Subtract the result of Step 2 from the result of Step 1. • The result of Step 3 is the entity's net debt deductions for an income year. The entity's net debt deductions may be a negative amount, which has the effect of that amount being subtracted from tax EBITDA. [Schedule 2, item 29 and 134, section 820-50 and subsection 995-1(1)] 2.63 These steps allow for an entity's net interest expense to be calculated according to concepts from Australia's income tax system and consistent with the OECD best practice guidance. This includes interest on all forms of debt, payments economically equivalent to interest, and expenses incurred in connection with the raising of finance (refer to paragraph 2.158 on the definition of debt deduction). 2.64 The regulation making power is necessary to ensure that appropriate amounts of interest income can be readily accounted for if they are identified at a later time. 2.65 In calculating the amount of depreciation deductions to add back to the tax EBITDA calculation, all deductions under Division 40 and Division 43 are generally allowed, except to the extent they are immediately deductible. For example, a taxpayer that claims a deduction under Subdivision 40-H that deals 20

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 with capital expenditure is immediately deductible, and therefore that expenditure is not added to tax EBITDA. 2.66 The exclusion of non-assessable non-exempt income from tax EBITDA is in line with OECD best practice to prevent an entity benefiting from a higher level of interest capacity as a result of receiving non-taxable income. 2.67 A special deduction in relation to debt deductions previously disallowed under the fixed ratio test may be available to taxpayers. The special deduction is discussed below from paragraph 2.111. Application to partnerships and trusts 2.68 Partnerships and trusts calculate tax EBITDA in effectively the same manner as other entity types. However, due to the operation of the tax legislation in relation to these types of entities, certain adjustments are made to ensure correct outcomes are achieved. Notably, the adjustments account for the fact that partnerships and trusts have 'net income' rather than 'taxable income'. [Schedule 2, item 29, section 820-52] 2.69 In calculating tax EBITDA for partners of a partnership and beneficiaries (and trustees) of a trust, certain adjustments are made to ensure that amounts included in the net income of partnerships and trusts are only counted towards tax EBITDA once. These adjustments aim to ensure that such amounts only count towards the tax EBITDA of partnerships and trusts, and not the tax EBITDA of the entities (partners, beneficiaries and trustees) to which such amounts may ultimately be assessed. These adjustments only apply where the partner or beneficiary are an associate entity of the relevant partnership or trust. [Schedule 2, item 29, section 820-52] 2.70 In working out whether a partner or beneficiary are an associate entity of the relevant partnership or trust, the same modified definition of 'associate entity' discussed in paragraph 2.43 above applies (although with a 10% modification instead of 20%). [Schedule 2, item 29, section 820-52] 2.71 For trusts, subsection 820-52(5) ensures that capital gains, franked distributions and franking credits are dealt with as part of the net income of trusts and are not otherwise removed from their net income. [Schedule 2, item 29, section 820-52] Operation of the group ratio test 2.72 The fixed ratio test does not specifically account for the fact that groups in different sectors may be leveraged differently for genuine commercial reasons. To supplement the operation of the fixed ratio test and account for more highly leveraged groups, Schedule 2 also introduces a group ratio test. 21

Thin capitalisation 2.73 Broadly, the group ratio test allows an entity in a sufficiently leveraged group to deduct net debt deductions in excess of the amount permitted under the fixed ratio rule, based on a ratio of the group's profits after adding back certain expenses. 2.74 If the group ratio test is chosen, the amount of an entity's debt deductions for an income year that are disallowed is the amount by which the entity's net debt deductions exceed the entity's group ratio earnings limit for the income year. 2.75 An entity's 'group ratio earnings limit' for an income year is its 'group ratio' for the income year multiplied by its tax EBITDA for the income year. [Schedule 2, items 29 and 126, subsections 820-51(2) and 995-1(1)] 2.76 An entity's 'group ratio' for an income year is calculated by reference to information contained in the relevant audited financial statements for the GR group parent for the group for the period corresponding to the relevant income year. In certain circumstances, taxpayers will be required to make adjustments to the amounts disclosed in the relevant financial statements to include amounts equivalent to interest and to disregard certain payments to associate entities. 2.77 An entity's 'group ratio' for an income year is worked out according to the following steps: • Step 1: Work out the GR group net third party interest expense of the GR group. • Step 2: Work out the GR group EBITDA of the GR group. Note, paragraph 820-46(3)(b) effectively prohibits an entity from applying the group ratio test if the GR group EBITDA is zero or less. • Step 3: Divide the result of Step 1 by the result of Step 2. • Subject to Step 4, the result of Step 3 is the entity's group ratio for the income year. • Step 4: If the result of Step 2 is zero, the entity's group ratio for the income year is zero. [Schedule 2, items 29 and 126, subsections 820-53(1) and 995-1(1)] 2.78 The 'GR group net third party interest expense' of a GR group for a period is the amount that would be the group's financial statement net third party interest expense if the relevant financial statements were prepared on the basis that the following were treated as interest: • an amount in the nature of interest; • amounts economically equivalent to interest. [Schedule 2, item 27 and 124, subsections 820-54(1) and 995-1(1)] 22

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 2.79 Treating those amounts as interest ensures that amounts that are economically equivalent to interest are used to calculate the GR group net third party interest expense. 2.80 The 'financial statement net third party interest expense' of a GR group for a period is the amount disclosed as such in the relevant financial statements for the period, disregarding certain payments made to or by associate entities outside the group. If no such amount is disclosed in the financial statements, then it is the amount of the group's third party interest expenses reduced by the amount of the group's third party interest income as disclosed in the relevant financial statements for the relevant period (disregarding certain payments made to or by associate entities outside the group). [Schedule 2, item 29 and 126, subsections 820-54(2)-(3) and 995-1(1)] 2.81 To ensure only third party amounts are used in the calculation of net third party interest expense, payments between GR group members and their associate entities that are outside the group are disregarded. For these purposes, the same modified definition of 'associate entity' discussed in paragraph 2.43 above applies. This prevents inappropriate inflation of the group ratio. [Schedule 2, item 29, subsection 820-54(5)] 2.82 The 'group EBITDA' of a GR group for a period is the sum of the following (as disclosed in the relevant financial statements for the GR group for the period): • the GR group's net profit (disregarding tax expenses); • the GR group's adjusted net third party interest expense; and • the GR group's depreciation and amortisation expenses. [Schedule 2, item 29 and 126, subsections 820-55(2) and 995-1(1)] 2.83 However, in working out the GR group EBITDA which includes one or more entities with a negative entity EBITDA amount, those negative amounts are disregarded. This ensures the operation of the group ratio test cannot be exploited by an entity to allow them to claim excessive debt deductions. [Schedule 2, item 29, subsection 820-55(3)] 2.84 The 'entity EBITDA' of an entity for a period is the sum of the following for the period: • the entity's net profit (disregarding tax expenses) - which may be expressed as a negative amount; • the entity's adjusted net third party interest expense; and • the entity's depreciation and amortisation expenses. [Schedule 2, item 29 and 123, subsections 820-55(1) and (4) and 995-1(1)] 23

Thin capitalisation 2.85 The 'adjusted net third party interest expense' of an entity or a group for a period, is the amount that would be the entity's or group's net interest expense for the period if the following payments were disregarded: • a payment made by the entity to an associate entity; • a payment made by an associate entity to the entity. [Schedule 2, item 29 and 120, subsections 820-54(4) and 995-1(1)] 2.86 These adjustments ensure that only third party amounts are used in the calculation of 'adjusted net third party interest expense'. For the purposes of the adjustments, the same modified definition of 'associate entity' discussed in paragraph 2.43 above applies. [Schedule 2, item 29, subsection 820-54(5)] Group ratio records 2.87 Entities are required to prepare and keep records of how they worked out their group ratio. Specific record keeping rules are necessary because entities may work out their group ratio using information that is not publicly available or otherwise accessible. 2.88 The records must contain the particulars that have been taken into account in working out the group ratio and must be sufficient for a reasonable person to understand how the group ratio has been calculated. The entity must prepare the records on or before the day the entity lodges, or is required to lodge, its income tax return for the income year. [Schedule 2, item 103, section 820-985] Operation of the third party debt test Overview of the third party debt test 2.89 The third party debt test effectively disallows an entity's debt deductions to the extent that they exceed the entity's debt deductions attributable to third party debt and which satisfy certain other conditions. This test replaces the arm's length debt test for general class investors and financial entities. However, ADIs will continue to have access to the arm's length capital test. 2.90 The third party debt test operates effectively as a credit assessment test, in which an independent commercial lender determines the level and structure of debt finance it is prepared to provide an entity. 2.91 The test is intended to be a simpler and more streamlined test to apply and administer than the former arm's length debt test, which operates based on valuation metrics and the 'hypothesised entity comparison'. 2.92 The third party debt test is designed to be narrow, to accommodate only genuine commercial arrangements relating only to Australian business operations. This is a considered design approach and is not intended to 24

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 accommodate all debt financing arrangements that may be accepted as current practice within industry. 2.93 In this regard, the third party debt test balances the tax integrity policy intent and the need to ensure genuine commercial arrangements are not unduly impeded. Operation of the third party debt test 2.94 If the third party debt test applies for an income year, the amount of an entity's debt deductions for the income year that is disallowed is the amount by which the entity's debt deductions exceed the entity's third party earnings limit for the income year. [Schedule 2, item 78, section 820-427] 2.95 An entity's 'third party earnings limit' for an income year is the sum of each debt deduction of the entity for the income year that is attributable to a debt interest issued by the entity that satisfies the third party debt conditions in relation to the income year. For these purposes, debt deductions of an entity that are: • directly associated with hedging or managing the interest rate risk in respect of the debt interest; and • not referrable to an amount paid, directly or indirectly, to an associate entity of the entity; are taken to be attributable to the debt interest (this rule is intended to only cover conventional 'interest rate swap' arrangements between unrelated parties). 'Debt interest' takes its meaning as defined in Subdivision 974-B. [Schedule 2, item 78 and 142, subsections 820-427A(1)-(2) and 995-1(1)] Third party debt conditions 2.96 A debt interest issued by an entity satisfies the 'third party debt conditions' in relation to an income year if the following conditions are satisfied: • the entity is an Australian resident; • the entity issued the debt interest to an entity that is not an associate entity of the entity; • the debt interest is not held at any time in the income year by an entity that is an associate entity of the entity; • the holder of the debt interest has recourse for payment of the debt only to Australian assets held by the entity. However, recourse to assets of the entity that are rights under or in relation to a guarantee, security or other form of credit support are prohibited, unless specified circumstances apply; and 25

Thin capitalisation • the entity uses all, or substantially all, of the proceeds of issuing the debt interest to fund its commercial activities in connection with Australia. The term 'all, or substantially all' is adopted to cover circumstances where all of the proceeds are used for the relevant activities but accommodating a minor or incidental use of the proceeds for other activities. [Schedule 2, items 78 and 142, subsections 820-427A(3) and 995-1(1)] 2.97 These conditions aim to ensure the third party debt test only captures genuine third party debt which is used to fund Australian business operations. 2.98 'Australian assets' is intended to capture assets that are substantially connected to Australia. The following assets are not intended to be Australian assets: • Assets that are attributable to the entity's overseas permanent establishments. • Assets that are otherwise attributable to the offshore commercial activities of an entity. 2.99 Recourse to rights under or in relation to forms of credit support (referred to in the following paragraphs as 'credit support rights') are generally prohibited to ensure that multinational enterprises do not have an unfettered ability to fund their Australian operations with third party debt. Given Australia's relatively high corporate tax rate, multinational enterprises may seek to fund their Australian operations with high levels of debt relative to their operations in other jurisdictions. 2.100 Subsection 820-427A(3) has the effect of allowing recourse to credit support rights in specified circumstances. Such recourse is allowed where the right relates wholly to the creation or development of a CGT asset that is, or is reasonably expected to be, real property situated in Australia (including a lease of land, if the land is situated in Australia). 'Real property' is intended to capture CGT assets such as land and buildings. In determining whether a right relates wholly to the creation or development of real property, incidental relations to other matters are disregarded. [Schedule 2, item 78, subsections 820-427A(4)-(5)] 2.101 To prevent 'debt dumping' into Australia, recourse cannot be had to credit support rights that would, in turn, allow for recourse against a foreign entity that is an associate entity of the holder of the right (e.g., a multinational parent entity). In particular, paragraph 820-427A(3)(b) provides that recourse cannot be had to a credit support right where that recourse would reasonably be expected to allow for, either directly or indirectly, recourse to be had against a foreign entity that is an associate entity of the holder of the right. [Schedule 2, item 78, paragraph 820-427A(4)(b)] 2.102 A credit support right only relates wholly to the creation or development of real property where the right arises under an arrangement the borrowing entity 26

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 enters into wholly in the course of creating or developing real property. For example, an arrangement under which the borrowing entity has the right to a commitment from investors to provide equity capital on a fixed and capped investment timeline wholly in relation to creating or developing real property. 2.103 The connection between a credit support right and the creation or development of real property must be tested continuously. Where a credit support right does not relate wholly to the creation or development of real property, then the exception provided by subsection 820-427A(3) does not apply. For example, where a credit support right initially related wholly to funding the creation or development of real property, but subsequently relates to other business activities in later income years in relation to the same real property (such as an investment holding activity where the real property development activity is completed), then the exception provided by subsection 820-427A(3) will not apply. 2.104 The exception provided by subsection 820-427A(3) is intended to cater for 'greenfield investments' or real property projects in development phase, where an entity would not yet have assets which a lender would consider sufficient security to support appropriate levels of third party debt funding. In such scenarios, in order for the project to proceed it may be necessary for investors to directly support the borrowing entity with the creation or development of real property (for example, equity commitment arrangements where equity is provided on a fixed and staged basis). The exception does not apply to credit support rights that support business activities beyond the creation or development of the relevant real property. Conduit financing conditions 2.105 Additional rules allow for conduit financer arrangements to satisfy the third party debt conditions in certain circumstances. Such arrangements are generally implemented to allow one entity in a group to raise funds on behalf of other entities in the group. This can streamline and simplify borrowing processes for the group. 2.106 In the context of the third party debt test, conduit financer arrangements exist where an entity (a 'conduit financer') issues a debt interest to another entity (an 'ultimate lender') and that debt interest satisfies the third party debt conditions. The conduit financier then on-lends the proceeds of that debt interest to one or more associate entities on substantially the same terms as the debt interest issued to the ultimate lender. 2.107 Broadly, the debt interest that the associate entities (the 'ultimate borrowers') issue to the conduit financier (the 'relevant debt interest') will satisfy the third party debt conditions if all of the following conduit financing conditions are satisfied: • the conduit financer and the borrowers are Australian residents; 27

Thin capitalisation • the conduit financer financed the amount loaned under the relevant debt interest only with proceeds from another debt interest (the 'ultimate debt interest'); • the conduit financer issued the ultimate debt interest to another entity (the 'ultimate lender'); • the borrowers are associate entities of each other and the conduit financer; • the borrowers issue the relevant debt interests to either the conduit financer or another borrower; • the amount loaned under each relevant debt interest does not exceed the proceeds of the ultimate debt interest; • the terms of the relevant debt interest are the same as the terms of the ultimate debt interest, where those terms relate to a cost incurred in relation to the relevant debt interest (for example, terms relating to interest payments). However, for these purposes, the following terms are to be disregarded: - terms of a debt interest to the extent that those terms relate to the amount of the debt; and - terms of the ultimate debt interest that have the effect of allowing the recovery of reasonable administrative costs that relate directly to the ultimate debt interest; and - terms of a relevant debt interest issued to the conduit financer that have the effect of allowing the recovery of reasonable administrative costs of the conduit financer that relate directly to the relevant debt interest; and - terms of a relevant debt interest that have the effect of allowing the recovery of costs of the conduit financer that are a debt deduction of the conduit financer and are treated as being attributable to the ultimate debt interest under subsection 820- 427A(2) (concerning interest rate swap arrangements); and • the ultimate debt interest satisfies the third party debt conditions in relation to any income year. [Schedule 2, item 78, section 820-427C] 2.108 When applying the third party debt conditions to a debt interest under the conduit financing conditions, the following modifications are made to the third party debt conditions: • for a relevant debt interest - the allowance for debt deductions under interest rate swap arrangements under subsection 820-427A(2) does not apply, meaning that debt deductions of borrowers under interest rate swap arrangements are disallowed; 28

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 • for a relevant debt interest - the entity is deemed to satisfy paragraphs 820-427A(2)(a) and (b) (requiring an entity issue the debt interest to an entity which is not an associate entity); and • for a relevant debt interest or ultimate debt interest - recourse can only be had to the following assets; - the Australian assets of the Australian resident conduit financer; - the Australian assets of each Australian resident member of the obligor group in relation to the ultimate debt interest. [Schedule 2, item 76, section 820-427B] 2.109 For conduit financing arrangements, the intention is that recourse can only be had to assets and entities which are sufficiently connected to Australia and the relevant Australian business operations. 2.110 To ensure the third party debt conditions are effective and cannot be readily avoided, the same modified definition of associate entity discussed in paragraph 2.43 above applies. [Schedule 2, item 78, subsection 820-427D] Special deduction for fixed ratio test disallowed amounts under the fixed ratio test 2.111 A special deduction for debt deductions disallowed under the fixed ratio test over the previous 15 years is available to general class investors in certain circumstances. 2.112 The special deduction available as part of the fixed ratio test addresses year-on-year earnings volatility concerns for businesses which are limited in their ability to claim debt deductions depending on their economic situation in a particular year. The rule also accommodates entities with initial periods of high upfront capital investment relative to their initial income or which incur interest expenses on long-term investments that are expected to generate taxable income only in later years. Such entities may be start-ups, tech firms and greenfield investments. 2.113 The special deduction allows entities to claim debt deductions that have been previously disallowed within the past 15 years under the fixed ratio test in a later income year when they are sufficiently profitable and where their fixed ratio earnings limit exceeds their net debt deductions. 2.114 The 15-year period is introduced to limit the tax benefit of disallowed amounts to a defined period. This reduces the impact of debt deductions being permanently disallowed and allows for the level of an entity's net debt deductions to be linked to its earnings over time. 29

Thin capitalisation 2.115 For the special deduction to apply, the entity must be using the fixed ratio test for the income year and its fixed ratio earnings limit for the income year must exceed its net debt deductions. An amount of those previously disallowed debt deductions up to the excess amount may be able to be deducted, subject to satisfying further criteria. If net debt deductions are equal to or higher than the fixed ratio earnings limit, then no previously disallowed debt deductions can be deducted. [Schedule 2, item 29, subsection 820-56(1)] 2.116 The amount of the deduction for an income year is worked out according to the following steps: • Step 1: Work out the amount by which the entity's fixed ratio earnings limit exceeds its net debt deductions for the income year. • Step 2 (the apply against excess step): Apply against that excess each of the entity's fixed ratio test disallowed amounts for the previous 15 income years (to the extent that they have not already been applied under this step in a previous income year). • Step 3: The amount of the deduction is the total amount applied under Step 2. [Schedule 2, item 29, subsection 820-56(2)] 2.117 An entity has a 'fixed ratio test disallowed amount' for an income year equal to the debt deductions of the entity for the income year that are disallowed under the fixed ratio test for that income year. [Schedule 2, item 29 and 126, sections 820-57 and 995-1(1)] 2.118 If an entity uses the fixed ratio test in an income year and chooses another test in a subsequent income year, the entity loses the ability to carry forward any existing fixed ratio test disallowed amounts for income years going forward. Entities must continue to use the fixed ratio test every income year to maintain access to their balance of carried forward fixed ratio test disallowed amounts. However, the mere fact that Division 820 does not apply to an entity in a subsequent income year will not result in fixed ratio test disallowed amounts being lost. The entity must choose another test for fixed ratio test disallowed amounts to become lost. [Schedule 2, item 29, sections 820-58] 2.119 Fixed ratio test disallowed amounts must be applied in sequence, such that fixed ratio test disallowed amounts attributable to the earliest income year, subject to the 15-year limit, are applied first. [Schedule 2, item 29, subsection 820-56(3)] 30

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Loss rules for disallowed amounts 2.120 If an entity is a company or trust, they must pass the company or trust loss rules in relation to their fixed ratio test disallowed amounts. [Schedule 2, item 29, subsections 820-59(1)-(3)] 2.121 If an entity is a company, they must pass a modified version of the COT or BCT in relation to each of their fixed ratio test disallowed amounts they are seeking to apply under Step 2 (the apply against excess step). If the modified COT or BCT is not passed in relation to a fixed ratio test disallowed amount, then the company cannot apply the amount under Step 2. [Schedule 2, item 29, subsection 820-59(4)] 2.122 Where the entity is a trust, they must pass a modified version of the trust loss rules in Schedule 2F to the ITAA 1936 in relation to each of their fixed ratio test disallowed amounts they are seeking to apply under Step 2 (the apply against excess step). If the modified trust loss rules are not passed in relation to a fixed ratio test disallowed amount, then the trust cannot apply the amount under Step 2. [Schedule 2, item 29, subsection 820-59(5)] 2.123 In line with the policy objectives of the loss rules, these provisions are intended to prevent the trading of fixed ratio test disallowed amounts between the beneficial owners of those amounts, prevent market distortions, and ensure tax neutrality. The special deduction and consolidated groups 2.124 To align with the tax consolidation rules that allow the transfer of tax losses into a tax consolidated group when an entity joins the group and limits the rate at which those losses can be utilised, the fixed ratio test disallowed amounts may also be transferred to and utilised by the head company of a tax consolidated group. 2.125 When an entity with a fixed ratio test disallowed amount joins a tax consolidated group, that fixed ratio test disallowed amount is transferred to the head company of that group at the joining time. This transfer occurs even where the joining entity becomes the head company of the tax consolidated group at the joining time. [Schedule 2, item 90, section 820-590] 2.126 However, the fixed ratio test disallowed amount is transferred only to the extent (if any) that the fixed ratio test disallowed amount could have been applied by the joining entity under Step 2 (the apply against excess step) in respect of an income year (the trial year). The trial year is generally the period commencing 12 months before the joining time to just after the joining time). [Schedule 2, item 90, section 820-590] 31

Thin capitalisation 2.127 Specifically, the fixed ratio test disallowed amount is transferred at the joining time from the joining entity to the head company if: • at the joining time, the joining entity had not become a member of the joined group (but had been a wholly-owned subsidiary of the head company if the joining entity is not the head company); and • the amount applied by the joining entity under Step 2 (the apply against excess step) in respect of the trial year were not limited by the joining entity's excess. [Schedule 2, item 90, section 820-590] 2.128 If a fixed ratio test disallowed amount cannot be transferred, then the amount is effectively lost and cannot be applied under Step 2 (the apply against excess step) by any entity. [Schedule 2, item 90, section 820-590] 2.129 The rules outlined above aim to ensure that fixed ratio test disallowed amounts can only be transferred if the joining entity is able to apply the fixed ratio test disallowed amounts under Step 2 (the apply against excess step). Otherwise, taxpayers may be able to circumvent the policy and rules relating to fixed ratio test disallowed amounts through the consolidation process. 2.130 If a fixed ratio test disallowed amount is successfully transferred, then the head company is treated as having that amount for the same income year in which the joining entity had the amount. This preserves the effect of the 15-year limit for fixed ratio test disallowed amounts. 2.131 However, for the purposes of applying the modified COT, the head company is treated as acquiring fixed ratio test disallowed amounts at the joining time. This rule is similar to that provided by existing section 707-140 in relation to tax losses and is necessary to ensure the modified COT is not automatically failed for income years occurring after consolidation. This is not a refresh of the 15-year utilisation period. [Schedule 2, item 90, subsection 820-591] 2.132 A head company may choose to cancel the transfer of fixed ratio test disallowed amounts that would otherwise be transferred by the joining entity. If the transfer is cancelled, the income tax law operates for the purposes of income years ending after the transfer as if the transfer had not occurred. That is, the loss cannot be utilised by any entity for those income years. [Schedule 2, item 90, sections 820-592 and 820-593] 2.133 When a tax consolidated group forms, or one or more entities join a tax consolidated group, tax costs for the assets of each joining entity are calculated by reference to the ACA for the joining entity. The ACA is essentially the sum of the cost base of membership interests in the joining entity and the joining entity's liabilities and certain profits. The cost base of the membership interests in the joining entity is effectively transferred to the assets of that entity. The 32

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 ACA is generally allocated to the assets the subsidiary brings into the group in proportion to their market values. 2.134 On exit from the group, the process is reversed and the group's cost base of the equity in the leaving entity is derived from the net assets of the leaving entity at the designated time. [Schedule 2, item 90, section 820-594] 2.135 A new step is added to the how the ACA of a joining entity is worked out under existing section 705-60 of the Act. New step 6A requires taxpayers to subtract from the result of step 6 the step 6A amount worked out under section 705-112. [Schedule 2, items 5 and 6, table item 6A in section 705-60] 2.136 The purposes of new step 6A is to stop the joined group getting benefits both through higher tax cost setting amounts for the joining entity's assets and through fixed ratio test disallowed amounts transferred to the head company. This is similar to purpose of step 6, which is about tax losses. 2.137 The step 6A amount worked out under new section 705-112 is generally worked out by multiplying the sum of the transferred fixed ratio test disallowed amounts by the corporate tax rate. [Schedule 2, item 9, section 705-112] 2.138 Step 6A is considered where a reduction under subsection 165-115ZA(3) of the ITAA 1936 is to some extent attributable to a (realised) loss that is taken into account in an amount subtracted under step 6A, then that reduction is, to that extent, added back. [Schedule 2, items 7 and 8, paragraphs 705-65(5A)(b) and (d)] Exemptions to the thin capitalisation rules 2.139 Section 820-37 currently provides an exemption to the thin capitalisation rules for outward investing entities in certain circumstances. 2.140 With the introduction of the new 'general class investor' concept, section 820-37 is amended to refer to the new Subdivision 820-AA and ensure it continues to apply to outward investing entities and now applies to general class investors who, assuming those general class investors were financial entities, would be an outward investing financial entity (non-ADI). If the entity is an inward investing financial entity (non-ADI) or inward investing entity (ADI) for any part of a year then it cannot access the exemption. [Schedule 2, items 19-20, subsection 820-37(1)] 2.141 These amendments maintain the policy intention of providing an exemption from the thin capitalisation rules for outward investing entities in certain circumstances. 33

Thin capitalisation 2.142 Section 820-35 currently provides an exemption from the thin capitalisation rules for an entity if the total debt deductions of that entity and all its associate entities for an income year are $2 million or less. Minor amendments are made to this section to ensure it includes the new thin capitalisation rules set out in new subdivision 820-AA. However, the $2 million or less threshold is unchanged. [Schedule 2, item 18, section 820-35] 2.143 Amendment are made to section 820-39 to ensure it applies to new Subdivision 820-AA. [Schedule 2, items 21 and 22, section 820-39] Debt deduction creation rules 2.144 Excessive debt deductions pose a significant risk to Australia's domestic tax base. 2.145 The strengthened thin capitalisation rules will play an important role in limiting excessive debt deductions. However, they do not address the risk of excessive debt deductions for debt created in connection with an acquisition from an associate entity or distributions or payments to an associate entity. Such debt deductions may only ever indirectly, and at most, be partially limited by the thin capitalisation rules. 2.146 New Subdivision 820-EAA seeks to directly address this risk by disallowing debt deductions to the extent that they are incurred in relation to debt creation schemes that lack genuine commercial justification. 2.147 Subdivision 820-EAA represents a modernised version of the debt creation rules in former Division 16G of the ITAA 1936. Subdivision 820-EAA is consistent with Chapter 9 of the OECD's BEPS Action 4 Report (specifically paragraphs 173 and 174 of that report) which recognises the need for supplementary rules to prevent debt deduction creation. 2.148 Subdivision 820EAA only applies to entities that are subject to the thin capitalisation rules and are not exempt from those rules under 820-35. Broadly, this means that the rules only apply to entities that are part of a multinational enterprise and have total debt deductions of over $2 million for the income year. [Schedule 2, item 78, section 820-423A] 2.149 Subdivision 820-EAA disallows debt deductions in two cases. These cases represent integral parts of schemes where artificial interest-bearing debt is created within a multinational group. Over time, this interest-bearing debt effectively allows for profits to be shifted out of Australia in the form of tax-deductible interest payments. 2.150 The first case broadly involves an entity acquiring an asset (or an obligation) from its associate. The entity, or one of its associates, will then incur debt deductions in relation to the acquisition of that asset. The debt deductions are 34

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 disallowed to the extent that they are incurred in relation to the acquisition, or subsequent holding, of the asset. For example, debt deductions arising from debt created by an entity would generally be disallowed if the debt created funded the acquisition of: • shares in a foreign subsidiary from a foreign associate; or • business assets from foreign and domestic associates in an internal reorganisation after a global merger. [Schedule 2, item 78, subsections 820-423A(2) and 820-423B(1)] 2.151 The second case broadly involves an entity borrowing from its associate to fund a payment to that, or another, associate. The entity will then incur debt deductions in relation to the borrowing. The debt deductions are disallowed to the extent that they are incurred in relation to the borrowing. For example, debt deductions arising from related party debt created by an entity to fund or increase the ability of the entity to make payments to a foreign associate as part of an entirely internal restructure would generally be disallowed. [Schedule 2, items 78 and 1220, subsections 820-423A(3), (3A) and 995-1(1)] 2.152 The payments or distributions referred to in the second case take the same meaning as in section 26BC of the ITAA 1936 and includes any amount credited, reinvested, applied to the benefit of another entity, settled on a net basis or on a non-cash basis, and the forgiveness of a debt. Payments or distributions may also include amounts of capital, such as returns of capital and repayments of principal under a debt interest. [Schedule 2, item 78, subsections 820-423A(4) and 820-423B(2)] 2.153 The provisions are drafted broadly to help ensure they are capable of applying to debt creation schemes of varying complexity. This approach is necessary given the ability of multinational groups to enter into complex debt creation arrangements. Anti-avoidance 2.154 An anti-avoidance rule ensures the debt deduction creation rules cannot be readily avoided. Broadly, if the Commissioner is satisfied that a principal purpose of a scheme was to avoid the application of the rules in relation to a debt deduction, then the Commissioner may determine that the rules apply to that debt deduction. [Schedule 2, item 78, subsection 820-423D(1)-(4)] 2.155 A determination by the Commissioner under subsection (2) is not a legislative instrument under the Legislation Act 2003. Subsection 820-423D(5) merely confirms this result. [Schedule 2, item 78, subsection 820-423D(5)] 2.156 Where an entity is dissatisfied with a determination that the Commissioner made in relation to the entity, the determination is reviewable under Part IVC 35

Thin capitalisation of the TAA 1953. [Schedule 2, item 78, subsection 820-423D(6)] 2.157 Limiting objections to determinations made under the debt creation rules is included to provide that an entity cannot object to part of the determination which relates to a matter already dealt with in an objection previously made. Where there has been a taxation objection against a determination under 820- 423D(2), then the right to object under Part IVC of the TAA 1953 to an assessment is limited to objecting on the grounds that neither were, nor could have been, grounds for the taxation objection against the determination. This is an appropriate amendment as it has the effect of ensuring that an entity can only make an objection on new grounds that does not relate to a previous objection. [Schedule 2, item 145, paragraph 14ZVA(a)] Definition of 'debt deduction' 2.158 The definition of 'debt deduction' in section 820-40 is amended to ensure it captures interest and amounts economically equivalent to interest, in line with the OECD best practice guidance. 2.159 It is intended that interest related costs under swaps, such as interest rate swaps, are included in the widened definition of debt deduction. 2.160 In particular, the definition is amended to ensure that a cost incurred by an entity does not need to be incurred in relation to a debt interest issued by the entity for that cost to be a debt deduction. This and other changes mean that amounts which are economically equivalent to interest, but which may not necessarily be incurred in relation to a debt interest issued by the entity, fall within the definition of debt deductions. [Schedule 2, items 23-28, section 820-40] 'Associate entity' - complying superannuation fund exemption 2.161 The definition of 'associate entity' in section 820-905 can operate too broadly in relation to superannuation funds and inappropriately restrict their ability to borrow. 2.162 The associate entity rules were introduced at a point when the Australian superannuation sector was in a relatively early stage. In the intervening period, superannuation funds have grown to have significant investments in a variety of different assets and are now an important source of capital investment for Australian assets, particularly infrastructure assets. Under the current rules, these investments may cause superannuation funds to have a relatively large number of associate entities, which would bring their investments into scope of the thin capitalisation rules. However, superannuation funds are subject to a relatively strong regulatory regime and generally do not exercise any 36

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 meaningful control over their associate entities. On this basis, the associate entity definition (to the extent it relates to the thin capitalisation rules) is no longer fit-for-purpose for Australian superannuation funds. 2.163 To address this issue, the definition of 'associate entity' in section 820-905 is amended so that it does not apply to a trustee of a complying superannuation entity (other than a self-managed superannuation fund) and any wholly-owned subsidiaries of the complying superannuation entity. [Schedule 2, items 101 and 102, subsection 820-905(1) and (2B)] Consequential amendments Transfer Pricing under Division 815 2.164 Section 815-140 makes modifications to certain transfer pricing rules in Division 815 where the arm's length conditions have operated to affect costs that are debt deductions. 2.165 The existing thin capitalisation rules operate to determine an amount of maximum allowable debt. Broadly, this is the amount of debt that an entity can have before its debt deductions are disallowed. 2.166 As debt deductions are disallowed on a quantum of debt basis in existing Division 820, section 815-140 effectively disapplies the arm's length conditions in relation to the quantum of the debt interest. For example, where the arm's length conditions involve applying a rate to a debt interest, the rate worked out is applied to the debt interest the entity actually issued instead of the debt interest that would have been issued had the arm's length conditions operated. 2.167 As the new thin capitalisation tests deny debt deductions on an earnings basis, the identification of arm's length conditions is not modified for entities using the new earnings-based tests or third party debt test. For these entities the amount of debt (and/or level of capital gearing) is a relevant condition for the purpose of considering the commercial or financial relations that operate between the respective parties and is not disallowed. Consequential amendments are made to ensure this outcome. [Schedule 2, item 10, section 815-140] 2.168 The arm's length conditions applying to a debt interest are determined in accordance with the normal rules contained in section 815-130. In doing so, it is necessary to consider the conditions operating between the relevant entity and other entities in relation to the commercial or financial relations that exist between them. For example, it is appropriate to determine the amount of debt with reference to the conditions that might be expected to operate between independent entities dealing wholly independently with one another in comparable circumstances. 37

Thin capitalisation 2.169 The arm's length rate for a particular debt interest is another arm's length condition. That rate applies to the arm's length amount of debt worked out for that debt interest. The entity's remaining debt deductions, after a transfer pricing adjustment is made to apply the arm's length conditions pursuant to section 815-115, are the relevant debt deductions for the purposes of Sub-division 820-AA. 2.170 After any other relevant parts of the ITAA 1936 and ITAA 1997, Sub-division 820-AA may reduce an entity's otherwise allowable debt deductions if the entity's net debt deductions for an income year exceed the relevant limit under the thin capitalisation tests applicable to that entity. General consequential amendments 2.171 Section 12-5 contains a comprehensive list of the specific types of deductions. The insertion of fixed ratio test disallowed amounts under the thin capitalisation rules has been added to this list. [Schedule 2, item 3, section 12-5] 2.172 Various objects provision throughout the thin capitalisation Division are updated to align with the changes to the rules and the reference to debt deductions reflect the new earnings based tests. [Schedule 2, items 11-15, sections 820-1, 820-5, 820-10, 820-30] General class investor consequential amendments 2.173 In line with the consolidated approach to group general investors, references to the definitions of 'outward investor (general)', 'inward investor (general)' and 'inward investment vehicle (general)' throughout Division 820 and the definition in section 995-1 have been removed. [Schedule 2, items 34-35, 37-39, 41, 59, 60, 71-73, 80, 105, 114, 127, 130, 140 subsections 820-90(1) and (2), paragraphs 820-185(3)(a) and (b), section 820-225(2), section 820-581, subparagraph 820-910(2)(a)(ii), 820-960(1)(a), and subsection 995-1(1)] 2.174 As a result of safe harbour debt amount for general investors being replaced, the steps in section 820-920 referring to associate entity excess amount is amended. Step 1 of subsection 820-920(4) is amended to refer to the updated general class investor label. [Schedule 2, item 112, subsection 820-920(4)] Fixed ratio test consequential amendments 2.175 The safe harbour debt test is no longer an option for general class entities as the fixed ratio test is the replacement test. Accordingly, provisions relating to the safe harbour debt test are repealed. [Schedule 2, items 42, 63, 64, 126, 141 sections 820-95, 820-195, 820-205 and subsection 995-1(1)] 38

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Group ratio test consequential amendments 2.176 The worldwide gearing debt test is no longer an option for general class investors as the group ratio test replaces it. Definitions and other provisions have been amended accordingly. [Schedule 2, items 46, 49, 66, 68, and 144, subsections 820-110(1), 820-111(1), sections 820-216, 820-218 and subsection 995-1(1)] 2.177 The repeal of section 820-110(1) has resulted in the reference to that provision in step 4(d) of subsection 820-920(3) no longer being applicable as general investors do not have access to the worldwide debt test. Financial entities under subsection 820-110(2) are unaffected and may continue to use this method statement if applicable. [Schedule 2, item 109 and 110, section 820-920(3)] 2.178 In line with the record keeping obligations amendments for entities applying the group ratio, in the case an entity is a partnership or unincorporated company the offence applies as if it were a person, but with relevant modifications. These provisions apply in conjunction with section 262A of the ITAA 1936 and Part III of the TAA 1953. This is consistent with the existing precedent and no amendments have been made to the amount of the offence. [Schedule 2, items 1, 2, 116 and 117 subsections 262A(2AA) of the ITAA 1936, paragraphs 820-990(1)(a) and 820-995(1)(a)] Third party debt test consequential amendments 2.179 The respective provisions for inward and outward investing (non-ADI) entities have been updated to reflect the disallowed debt deduction that arises from applying the third party debt test and the corresponding calculation of the disallowed amount that is worked out by disallowing each debt deduction on a proportionate basis. [Schedule 2, item 32, 33, 52-53, 54, 58, 69 and 70, section 820-85, subsections 820-115(1)-(3), sections 820-180 and 820-185, subsections 820-220(1)-(3)] 2.180 Consequential amendments are made to paragraph 820-583(3)(a) to reflect the updated table items in subsection 820-85(2). [Schedule 2, item 84, subsections 820-583(3)(a)] 2.181 The introduction of the third party debt test results in references to the arm's length debt test being removed and the inclusion of notes that differentiate between general class investors and financial entities. The updated financial entity label change has resulted in definitions and other provisions throughout Division 820 being amended accordingly. [Schedule 2, items 30-31, 36, 40, 43-45, 47-48, 50-51, 54-55, 57, 61-62, 65, 67, 74-77, 79, 81-83, 85-89, 91-100, 104, 106-111, 113, 115-117, 121, 128- 132, 136, 138-139, and 143, Subdivision 820B and section 820-65, subsections 820-90(1) and (2), sections 820-100, 820-105, subsections 820- 39

Thin capitalisation 110(2) 820-111(2), paragraph 820-120(1)(a) and Subdivision 820C, section 820-185, section 820-190(1), sections 820-215 and 820-217, subsections 820- 300(1)(2) and subsection 820-395(2A)(2B), subsections 820-430(1), 820-583(1)-(2), (4)-(5), (7), 820-585(2) and 820-588(1), subsections 820- 609(1), (4)-(6), subsections 820-610(2)-(3), (7), 820-630(1), and section -820- 740, items , subsections 820-910(1) and (2), subsections 820-915(1), 820- 920(1) and (3), paragraph 820-946(1)(a), section 820-980, and subsection 995-1(1)] 2.182 The repeal of sections 820-105 and 820-215 for general entities has the effect of not requiring records to be kept in working an amount of arm's length debt as it is no longer an option for general entities. [Schedule 2, item 117, subsection 820-980(2)] Commencement and application provisions 2.183 Schedule 2 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October after the Bill receives Royal Assent. 2.184 The amendments apply in relation to income years commencing on or after 1 July 2023. [Schedule 2, item 146] 2.185 An entity that makes a choice under 820-430(1) before the commencement of Schedule 2 to the Bill will continue to have effect. [Schedule 2, item 147] 40

Chapter 3: Statement of Compatibility with Human Rights Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Table of Contents: Schedule 1 - Multinational tax transparency--disclosure of subsidiaries ............................................................................................................. 41 Overview ....................................................................................... 41 Human rights implications ............................................................. 42 Conclusion .................................................................................... 42 Schedule 2 - Thin capitalisation ........................................................... 42 Overview ....................................................................................... 42 Human rights implications ............................................................. 43 Conclusion .................................................................................... 43 Schedule 1 - Multinational tax transparency-- disclosure of subsidiaries Overview 3.1 Schedule 1 to the Bill does not engage with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. 3.2 Schedule 1 to the Bill introduces new rules on the disclosure of information about subsidiaries. The amendments require additional disclosures by public companies and do not apply to natural persons. 41

Statement of Compatibility with Human Rights 3.3 Australian public companies (listed and unlisted) will be required to disclose information on their subsidiaries. This measure will place an onus on companies to be more transparent about their corporate structures. Disclosures would be made publicly available within the company's annual financial report published on their website to minimise compliance burden. 3.4 The intent is that increased public disclosures will lead to enhanced scrutiny on companies' arrangements, including how they structure their subsidiaries and operate in different jurisdictions, including for tax purposes. 3.5 Under the amendments, for each financial year commencing on or after 1 July 2023, Australian public companies must, as part of their annual financial reporting obligations under Chapter 2M, provide a 'consolidated entity disclosure statement': • If the accounting standards require the public company to prepare financial statements in relation to a consolidated entity - the 'consolidated entity disclosure statement' is a statement that includes disclosures about entities within the consolidated entity at the end of the financial year. • If the above does not apply - the 'consolidated entity disclosure statement' is a statement to that effect. Human rights implications 3.6 Schedule 1 to the Bill does not engage any of the applicable rights or freedoms. Conclusion 3.7 Schedule 1 to the Bill is compatible with human rights as it does not raise any human rights issues. Schedule 2 - Thin capitalisation Overview 3.8 Schedule 2 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. 3.9 The amendments address risks to Australia's domestic tax base arising from the excessive use of interest expenses or debt deductions, which amount to base erosion or profit shifting arrangements. The amendments introduce new 42

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 thin capitalisation earnings-based rules for certain entity types, replacing the existing asset-based rules, and establishing a new arm's length debt test in the form of a third party debt test. Schedule 2 also amends the existing thin capitalisation rules as appropriate to ensure they continue to be fit for purpose. 3.10 These amendments align with the OECD's best practice guidance, which recommends limiting an entity's deductions for net interest, and payments economically equivalent to interest, to a percentage of the entity's EBITDA. This reflects the view that aligning debt deductions with taxable economic activity is a more robust approach to address base erosion and profit shifting from excessive interest expenses. Human rights implications 3.11 Schedule 2 to the Bill does not engage any of the applicable rights or freedoms. 3.12 Interest expenses are deductible when borrowed funds are used to produce assessable income or in carrying on a business for that purpose. The amendments are intended to limit the deductions for interest expenses for entities that are part of a multinational enterprise. Therefore, Schedule 2 does not engage any applicable human rights. Conclusion 3.13 Schedule 2 to the Bill is compatible with human rights as it does not raise any human rights issues. 43

Attachment 1: Impact Analysis for Schedule 1 Table of Contents: Table of Contents: ............................................................................... 45 Introduction / Executive Summary ....................................................... 46 The problem ......................................................................................... 47 Case for government action/objective of reform .................................. 49 Policy options....................................................................................... 50 Option 1: Maintain existing arrangements ..................................... 50 Option 2: Implementation of the Government's election commitment to enhance tax transparency reporting .......................................... 51 Cost benefit analysis / Impact analysis ................................................ 52 Option 1 - status quo .................................................................... 52 Option 2 - implementation of election commitment ....................... 52 Consultation Plan ................................................................................. 56 Consultation: discussion paper (August 2022) .............................. 56 Consultation summary................................................................... 56 Preferred option and implementation ................................................... 59 Public Country by Country Reporting ............................................ 60 Disclosure of corporate subsidiary information .............................. 63 Requiring government tenderers to disclose their country of tax domicile ......................................................................................... 64 Evaluation ............................................................................................ 65 45

Impact Analysis for Schedule 1 Introduction / Executive Summary The Government, as part of its election commitment platform, announced a multinational (MNE) tax integrity package to address MNE tax avoidance and to improve transparency through better public reporting of MNEs' and corporate entities tax information. These changes form part of the Government's overall commitment to repair the Budget and improve the fairness and integrity of the tax system. Tax integrity issues arise due to MNEs adopting tax planning practices which take advantage of the differences between jurisdictions' tax systems to minimise their tax paid, typically by moving the incidence of taxation from a high taxation jurisdiction to a low taxation jurisdiction, or by avoiding a taxable presence in high taxation jurisdictions altogether. This can be aided by opaque tax disclosures. Increased tax transparency can help to deter corporate entities from entering into arrangements to minimise their tax paid by 'holding companies to account' on their activities in a jurisdiction. This contributes to the welfare of Australian society. The enhanced public scrutiny that tax increased transparency allows a better assessment of taxpayer activities, and the impact of those activities on the economy, including the amount of tax paid. Transparency, in this regard, is a key factor underpinning the integrity of the tax system. This impact analysis addresses the tax transparency element of the Government's election commitment, as announced in the October 2022-23 Budget, to require: • the public reporting of tax information on a country-by-country (CbC) basis, targeting MNEs defined as CbC reporting entities2, with annual global income of A$1 billion or more), • Australian public companies to disclose information on the number of subsidiaries and their country of tax domicile; and • tenderers for Australian government contracts to disclose their country of tax domicile. This impact analysis considers the way this commitment (and specific elements within) should be implemented, with reference to the status quo. It has been informed by two rounds of public consultation, including on exposure draft legislation, and targeted consultation. Stakeholder feedback on the implementation options focused on the cumulative compliance burdens that arise from increased transparency. The final option to be implemented by Government reflects this feedback. This impact analysis is principally a qualitative assessment, assessing the trade-offs between increased tax transparency/better data availability with compliance burdens from this increase in reporting. It concludes that introducing a legislative framework for public CbC reporting and corporate subsidiary disclosures is an appropriate tool for 2 CbC reporting entities are a subset of Significant Global Entities 46

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 increasing tax transparency, to better address information asymmetries with corporate tax disclosures, although there may be benefit in further consultation with industry on elements of the public CbC measure. Amendments to policy design after stakeholder consultation seek to minimise compliance burdens and still provide meaningful disclosure. The problem At a high-level, the problem is about addressing information asymmetries in corporate tax arrangements with a specific focus on MNEs and large businesses tax disclosures, to help address tax avoidance. This contributes to the Government's broader intent to ensure taxation laws operate to raise the intended revenue. Following the 2008 Global Financial Crisis, corporate tax avoidance has been a matter of considerable public attention3, giving rise to revelations of aggressive tax planning by MNEs and concerns about whether MNEs are engaged in unacceptable corporate tax avoidance, aided by lax tax transparency disclosures. Tax avoidance is where a business artificially structures its activities to avoid tax. Typically, this will involve structures designed to avoid attributing profits to, or limit a business's taxable presence in, a high tax jurisdiction by taking advantage of differences between countries' tax systems to create opportunities for entities to minimise their tax. MNEs are well placed to take advantage of these differences; they have greater capacity to structure corporate groups and commercial transactions so that income is taxed in low tax jurisdictions. The OECD estimates that base erosion and profit shifting (BEPS) practices cost countries 100-240 billion USD in lost revenue annually4. In the Australian context, Australia's relatively high corporate tax rate, the increasing prevalence of highly mobile intangible assets (e.g., intellectual property), and the increased mobility of economic activity generally, can provide MNEs with incentives and the opportunity to structure arrangements to artificially lower their tax. This is different to tax minimisation where a business legitimately applies the tax concessions available to it. There are often valid reasons for a business paying no tax. Transparency builds trust in tax systems and enhances tax morale5 by helping to deter MNEs from entering into arrangements to lower their tax paid. Enhanced public scrutiny from increased tax transparency is intended to 'hold companies to account' on their activities in a jurisdiction, to support a better assessment of MNEs' activities in 3 Economic Modelling, 2015, Volume 44, The Impact of financial distress on corporate tax avoidance spanning the GFC: evidence from Australia, pp 44-53 4 https://www.oecd.org/tax/beps/ 5 Global Initiative for Fiscal Transparency, 2022, https://blog- pfm.imf.org/en/pfmblog/2022/10/developing-and-using-global-tax-transparency-principles 47

Impact Analysis for Schedule 1 Australia, and the impact of those activities on the economy, including whether they pay an appropriate amount of tax. Australia's current approach to tax transparency is comprised of three core limbs: the ATO Corporate Tax Transparency Report6, the Board of Tax Voluntary Tax Transparency Code and the (confidential) OECD CbC reporting BEPS minimum standard. There are issues with each limb, as outlined below. The availability of entity tax information is only likely to encourage trust if the community can access, understand, and use the information7. That is, transparency regimes which give rise to mixed messaging detracts from an informed understanding among the public of an entity's tax position and limits the ability for civil society and the public to scrutinise corporate behaviour and assess whether it meets public expectations. For example, misunderstandings on the valid role that tax losses play in determining an entity's tax position8. Transparency is also dependent on verifiable data. While the ATO's Corporate Tax Transparency Report is based on information sourced from tax return information, the Board of Taxation's Voluntary Tax Transparency Code (endorsed in the 2016-17 Budget to improve corporate tax transparency disclosures in Australia)9, has been criticised by groups who have raised questions regarding the integrity of the information published voluntarily by companies10. The voluntary nature of the report has also resulted in low rates of adoption11. The OECD's CbC reporting framework is a BEPS Action minimum standard, adopted by all OECD countries to support tax administrations in the high-level detection and assessment of transfer pricing and other BEPS-related risks, and is subject to confidentiality restricting what data can be published. While the OECD publishes high- level, anonymised statistics on the data collected from the OECD CbC reports (to support the economic and statistical analysis of BEPS behaviour and of MNEs in 6 https://www.ato.gov.au/business/large-business/corporate-tax-transparency/ 7 The World Bank, Innovations in Tax Compliance: Building Trust, Navigating Politics, and Tailoring Reform, 2022, https://openknowledge.worldbank.org/server/api/core/bitstreams/7225ce2e-99d7-50b7-9ae7- a640a95ae2c0/content 8 The ATO's Corporate Tax Transparency report, released annually, generates significant interest within the community, with commentators typically focussing on entities reporting a nil corporate tax liability. While the information in this report is sourced from tax return information, it excludes various tax return label items, such as tax losses information, from being disclosed. The exclusion of label items can hinder the general community's understanding of the tax affairs corporate tax entities, resulting in (at times) a misinformed public discourse on corporate taxation. 9 https://taxboard.gov.au/current-activities/corporate-tax-transparency-code-and-register 10 Board of Taxation, 2019, https://taxboard.gov.au/sites/taxboard.gov.au/files/migrated/TTC- Consultation-Paper-final.pdf 11 ATO and Treasury data: there are approximately 200 signatories to the Code out of an estimated cohort of over 3,000 entities (that could be reporting under the Code). 48

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 general), there are several limitations that affect the quality of the data, such as the data being too aggregated12 and source/microdata issues affecting comparability of data across jurisdictions13. The issues outlined above - limited transparency, consistency and accessibility - with Australia's existing tax transparency regime informed, in part, the Government's election commitment to improve tax transparency. The other guiding element was recent international developments, namely, the European Union's decision in 2021 to legislate a public CbC reporting regime to increase transparency in relation to the activities of multinational undertakings and to enable the public to assess the impact of those activities on the real economy14. The EU's move to mandate public CbC reporting reflects the shifting public expectations on MNE tax transparency15. However, the EU approach currently only provides for CbC reporting in respect of EU member states and EU listed non- cooperative jurisdictions. The 'rest of world' activity is reported on an aggregated basis, limiting economic analysis of MNE BEPS risks, including in Australia. There is a risk, however, that enhanced tax disclosures will not effectively address concerns about unacceptable corporate tax avoidance16. This arises from the trade-off between the compliance burden for MNEs from increased tax transparency and increased (improved) data availability for the economic analysis of BEPS. An effective tax transparency regime should balance the 'public good' element of improved transparency while minimising burdens on the taxpayer (including having regard for MNEs' commercially sensitive information and continuing to support investment intentions in Australia). Case for government action/objective of reform Tax avoidance is a broad problem and can be addressed via targeted integrity changes and increased tax transparency. The increased transparency limb addresses information asymmetries to better ensure increased transparency, consistency and accessibility of tax information. 12 OECD, 2022, https://www.oecd.org/tax/tax-policy/corporate-tax-statistics-country-by-country- reporting-FAQs.pdf 13 OECD, 2022, https://www.oecd.org/tax/beps/common-errors-mnes-cbc-reports.pdf 14 Official Journal of the European Union, 2021, https://eur-lex.europa.eu/legal- content/EN/TXT/PDF/?uri=CELEX:32021L2101 15 KPMG, 2023, https://kpmg.com/xx/en/blogs/home/posts/2022/11/esg-scrutiny-shines- spotlight-on-tax-transparency.html 16 Accounting and Business Research, 2019, Volume 49, Issue 5: International Accounting Policy Forum, pp, 565-583 49

Impact Analysis for Schedule 1 The Government's election commitment to increase tax transparency is part of a broader legislative package to ensure multinationals and corporate entities pay the appropriate level of tax. The objective of this policy is to introduce targeted and balanced tax transparency initiatives directed at MNEs and corporates, to deliver improvements in the quality and comparability of tax disclosures, strengthen tax transparency, and improve the flow of useful information to the community, to support economic analysis of BEPS. This is best achieved through legislative changes, rather than a voluntary approach. A legislative approach will ensure more consistent data in relation to the activities of MNEs and corporate entities, leading to better data analysis. This will assist the public to assess the impact of corporate activities on the real economy, which helps build community trust in the tax system. A legislative approach will also support better taxpayer compliance with the changes, than via a voluntary framework. The government's announcement of its public country-by-country reporting measure was informed by international initiatives, namely the European Union's decision in 2021 to legislate a public CbC reporting regime. Similarly, the Government's corporate subsidiary disclosure measure is informed by legislative changes in the UK in 2016. The expected outcome from legislative changes targeting improved transparency is a moderation of corporate behaviour towards less aggressive tax planning. This will contribute to reducing the large corporate groups income tax gap - reflecting that the adoption of transparency measures, as part of a suite of legislative reforms, supports increased tax compliance/tax payable17. However, to be effective, increased tax transparency should balance public accessibility/better data while not imposing excessive compliance costs on corporate taxpayers and protecting taxpayer sensitive information. That is, taxpayers (particularly foreign incorporated entities) not complying with the new disclosures would detract from the policy intent of improved transparency. Policy options Option 1: Maintain existing arrangements This option would involve no change to Australia's tax transparency framework. That is, corporate entities would continue to publish selected tax information using different reporting metrics and standards, and in different reporting contexts, with varied levels of public accessibility. 17 ATO, 2022, https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Tax- gap/Large-corporate-groups-income-tax-gap/ 50

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Option 2: Implementation of the Government's election commitment to enhance tax transparency reporting This option would address information asymmetries with the current tax transparency regime by enhancing the public reporting requirements of MNEs and public companies operating in Australia via: • the public reporting of tax information on a country-by-country basis by MNEs18, - This will support quantitative benchmarking of an entity's behaviour using consistent information, by ensuring the tax information reported is standardised, publicly accessible and readable (i.e. relatively easy to interpret). • Australian companies disclosing information on their subsidiaries, and - This measure was developed in place of the Government's originally announced election commitment that companies disclose to shareholders their business in a jurisdiction with a tax rate less than 15 per cent), in response to stakeholder feedback (see consultation section). • Separately, this option would also: • require tenderers for Australian government contracts (worth more than $200,000) to disclose their country of tax domicile. - The $200,000 value is an existing threshold in the Commonwealth Procurement Framework. It is the second highest threshold. - This element does not require legislative amendments and will instead be implemented via administrative changes to the Commonwealth Procurement material. Requiring tenderers to disclose their tax domicile is a small part of the Government's overall intent to enhance the information that entities disclose in certain circumstances. 18 Defined as CbC reporting entity, generally an entity with annual global income of A$1 billion or more (Subdivision 815-E of the Income Tax Assessment Act 1997). Further information on CbC reporting can be found at: www.ato.gov.au/business/international-tax-for-business/in- detail/transfer-pricing/country-by-country-reporting/ CbC reporting entities 51

Impact Analysis for Schedule 1 Cost benefit analysis / Impact analysis Option 1 - status quo Maintaining the status quo would result in no change to corporate tax disclosures. It would also mean Australia's tax transparency framework is not responding to global developments towards greater transparency and accountability on corporate activity, particularly from large business. Compliance costs are assumed to be neutral under this option. Option 2 - implementation of election commitment Public Country by Country Reporting The introduction of a public CbC regime is intended to support better tax compliance and help ensure taxation laws operate to raise the intended revenue. Public CbC reporting is intended to operate in parallel with other measures to address tax avoidance risks. While increased tax transparency works to curb aggressive tax behaviour and will contribute to closing the gross tax gap of large corporates (estimated at $4.6 billion, 2019-20)19, the benefit impact of public CbC reporting is primarily a qualitative assessment - this form of impact analysis is also reflected in the EU's assessment of public CbC reporting. Public CbC reporting contributes to the welfare of Australian society, more broadly, by enhancing the public scrutiny of corporate income taxes borne by MNEs. This helps to foster increased corporate transparency and responsibility, which, in turn, builds community trust in the tax system. Enhanced public scrutiny works by 'holding companies to account' on their activities in a jurisdiction and supports a better assessment of MNEs' activities in Australia and the impact of those activities on the economy, including whether they pay an appropriate amount of tax. As the EU noted when they introduced their public CbC reporting directive, "such public scrutiny is necessary to promote a better-informed public debate regarding, in particular, the level of tax compliance of certain multinationals ... and the impact of tax compliance on the real economy"20. The same applies in the Australian context. This increase in corporate income tax transparency also works to serve the general economic interest by providing for a safeguard for investors and other third parties 19 ATO, 2022, https://www.transparency.gov.au/annual-reports/australian-taxation- office/reporting-year/2021-22 20 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32021L2101 52

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 generally - for example, through more informed and accurate information to assess capital investments. For companies, the increased transparency can lead to a clearer risk profile and an enhanced reputation, which would support better access to capital. The option to prescribe this reporting requirement in legislation is in keeping with international trends, reflecting the shift towards legislating transparency reporting frameworks - such as the EU's directive on public CbC. A legislative approach ensures standardised information disclosures, verifiable data and provides that the data is published in a central location. This enhanced data set will support better economic analysis of BEPS risks contributing to a more informed discourse on tax settings in Australia, including whether the tax laws are operating as intended. While public CbC will be a new disclosure regime and will contribute to some compliance costs, these costs can be justified given the public good outcomes outlined above. We estimate that the compliance costs would be relatively minor compared to the revenues of in-scope multinationals. However, the implementation approach seeks to minimise compliance burdens by leveraging existing transparency disclosures which entities comply with currently, either under the OECD BEPS Action 13, or voluntarily through the Board of Taxation's Tax Transparency Code or Global Reporting Initiative tax standard. We also note that while the Global Reporting Initiative has relatively low uptake for tax disclosures, it is a common reporting standard for MNEs internationally to comply with their governance requirements21. We note that compliance costs could be considered further with additional consultation on elements of the measure. Public CbC reporting would apply to Australian parent entities and foreign head quartered entities that meet the definition of a CbC reporting entity, with the onus to publish the public CbC report falling on the parent entity. This reflects that the parent entity will have the requisite information. We estimate around 2,500 entities may be subject to the new regime, based on the entities that are subject to the OECD CbC reporting regime22. The tax label disclosures were informed by stakeholder feedback and amended to reflect existing CbC disclosure labels more closely. Reflecting the implementation changes, minor one-off increases in compliance costs associated with complying with the new CbC disclosure obligations are likely to occur in the first income year following commencement. We note there will be initial search costs, namely a learning and education component and potentially evaluation and planning requirements, however, these are not anticipated to be significant, given the final design reflects, generally, existing CbC disclosures (such as MNEs disclosures to tax administrators as part of their OECD BEPS Action 13 obligations). Stakeholder 21 https://assets.kpmg.com/content/dam/kpmg/se/pdf/komm/2022/Global-Survey-of- Sustainability-Reporting-2022.pdf 22 https://stats.oecd.org/Index.aspx?DataSetCode=CBCR_TABLEI (Aggregate data reverse engineered) 53

Impact Analysis for Schedule 1 submissions did not quantify the estimated compliance cost to comply with this regime. Treasury's estimates of the administrative (labour) costs are based on the initial search costs. This estimate has not considered data automation or internal systems upgrades, owing to a lack of available information. Regulatory impact costs Potential compliance costs Total Implementation $25,000,000 (2,500 entities x $10,000 per entity) 23 We anticipate entities to incur minor ongoing record keeping costs, however this should align with current practices or reflect business as usual procedure. Disclosure of subsidiary information The policy intent of subsidiary disclosures is to increase the transparency of company structuring arrangements. The use of complex structures and multiple subsidiaries globally can be an indicator of base erosion and profit shifting risk, for instance, using related party payments and purchases to reduce Australian tax payable. This disclosure will enhance the public scrutiny as to how public companies operate in Australia by removing discretion around what is or is not included in financial reporting. For example, the requirement to report on all subsidiaries is intended to capture structures that may not currently meet the existing threshold for disclosure (generally based on a subjective "materiality" assessment), but nonetheless may have some form of control/influence over the domestic entity. This approach is consistent with other jurisdictions, such as the UK, which has similar laws. Additionally, Treasury is of the understanding that when similar disclosure obligations had been introduced overseas (such as in the UK), that it resulted in some companies opting to simplify their structures (either by removing dormant structures or operating through subsidiaries). This outcome would further support the increased transparency outcome by reducing opaque tax structures. 23 Estimate has low reliability and has not been tested; stakeholders did not respond to questions on regulatory costs in a quantitative way. The estimate is an average-based assumption of two tax advisors with in-house charge rates of $1,000, for 5 hours, assessing the law and new obligations. It reflects prior allocative efficiencies, namely: a large population of CbC reporting entities will have already familiarised themselves with the EU Directive which has similar disclosures; these same entities already comply with OECD CbC reporting; some of these entities, including in the extractives industry, already comply with the GRI; and that MNEs generally are shifting towards enhanced corporate governance, reflected in more detailed investor material on company websites. The rates are estimates, as charge fees are generally not published. 54

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 When applied with the public CbC reporting option, this will hold companies to greater account on their corporate structuring/tax affairs. While the population of in-scope entities is potentially large24, this option is anticipated to have an observed compliance effect only on entities with complex structures (i.e. those operating with multiple subsidiaries). As an indicative estimate, there are approximately 471 large corporate groups (Australian public companies), with a group turnover greater than $250 million25. These entities operate across all sectors. This cohort is the focus of the estimated regulatory burden measurement - this has not been tested with industry, as stakeholders did not respond to relevant questions in consultation in a quantitative manner. We anticipate compliance burdens to be muted for listed ASX companies, who already provide this disclosure, in some form, and should have the requisite information ready. For smaller companies, the compliance effect is expected to be negligible, on the assumption they operate with minimal (or no) subsidiary operations; that is, smaller companies with no subsidiaries will only need to report a 'nil' item. The requirement to report subsidiary information will occur through a company's existing annual reporting process, helping to minimise compliance costs. That is, in- scope entities reporting their financial statements (which may include some information on subsidiaries), notes to the financial statements, and a director's report will add an additional report to this package of documents. We expect reporting entities would have this information (i.e. it is not new information), although we accept that it is an additional impost on company directors/auditors, which we anticipate falling largely in the initial reporting period. Stakeholders did not quantify the estimated cost. On balance, we estimate the administrative (labour) costs, based on an initial transaction (search) costs could be: Regulatory impact costs Potential compliance costs Total Implementation $ 4,710,000 (471 entities x $10,000 per entity) 26 24 Unlisted public company data is not published, however based on financial report lodgings with ASIC in the 12 months to 30 June 2022, we estimate around 5,750 entities are in scope. Additionally, as of 16 May 2023, there were 2,110 ASX or NSX listed Australian formed entities (public companies). https://www2.asx.com.au/markets/trade-our-cash-market/directory https://www.nsx.com.au/marketdata/directory/ . 25 https://www.ato.gov.au/General/Tax-and-Corporate-Australia/In-detail/Demographics-of- large-corporate-groups/ 26 Estimate has not been tested. It is an average-based assumption of a tax advisor and an accounts auditor with in-house charge rates of $1,000, for 5 hours, assessing the law and new obligations. It reflects that in-scope entities would likely already have the requisite information 55

Impact Analysis for Schedule 1 Requiring government tenderers to disclose their country of tax domicile Regulatory impact costs The measure is a continuation of existing disclosure requirements already in place when bidding on Australian government contracts. The requirement to disclose tax domicile information is a one-line label in the tender documentation and expected to have a negligible regulatory impact, rounded down to zero. The overall benefit of this element is expected to be minor, however it does contribute to the overall intent of ensuring that businesses are more upfront about their tax affairs. Consultation Plan Treasury conducted extensive stakeholder consultation on these policy options. The general feedback on each measure is summarised below. Consultation: discussion paper (August 2022) A discussion paper on the government's election commitments was released for public consultation, from 5 August to 2 September 2022. Treasury met virtually and in-person with industry representatives from the corporate sector, tax advisory firms, academics and civil society. Submissions (some in confidence) were received from businesses, industry groups, academics, civil society groups and individuals. Virtual meetings were also held with several stakeholders. A full list of stakeholder submissions can be found at: https://treasury.gov.au/consultation/c2022-297736. A summary of key themes raised by stakeholders is provided below. This feedback informed the Government's October 2022-23 Budget announcement. Consultation summary Public CbC reporting: Stakeholders expressed general support for increased tax transparency reporting. Stakeholders supported leveraging existing CbC reporting requirements (such as the EU Directive or the GRI Tax Standard) to minimise compliance costs. Standardised reporting formats and transitional arrangements were also suggested to help minimise compliance burden and aid transition to any new requirements. and systems in place to respond. The rates are estimates, as charge fees are generally not published. 56

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Disclosing material tax risk to shareholders: Stakeholders (generally) queried the subjective nature of 'material tax risk noting it is an undefined concept, and reflected on the 15 per cent threshold, noting that while it was intended to align with developments to implement a global minimum tax, it would likely create inconsistencies/uncertainty given this work is yet to be finalised. Several stakeholders suggested more meaningful information would be captured if corporates disclosed all subsidiaries, they are operating through instead of disclosing if they are doing business in a low-tax jurisdiction. Government tenderers disclosing their country of tax domicile: This element attracted minimal attention, although there was general support of this proposal with stakeholders noting it was unlikely to be burdensome. Some stakeholders suggested using tax residency would be a more suitable concept instead of tax domicile which is not clearly defined as an Australian tax concept. Some stakeholders questioned its value in exposing how much Australian or foreign tax will be paid on income from government contracts (or why it was part of a MNE tax integrity package). In response, the suggested approach to require Australian companies (listed and unlisted) to disclose their subsidiaries (and the location of the tax residency and place of incorporation) was implemented in line with industry feedback. This would be in line with the UK's corporate transparency rules. While this will not disclose the specific tax rates of the jurisdictions in which subsidiaries are located, it will highlight how companies' structure, with the intent that once this information is in the public domain, entities would reconsider their corporate tax structures. Some stakeholders noted anecdotal experience in the UK has resulted in a decrease of the number of subsidiaries following implementation of this disclosure requirement. This disclosure would complement the information that would be reported on a country- by-country basis as part of the broader mandatory transparency reporting arrangements under Option 2. Treasury worked closely with the ATO and the Australian Securities and Investments Commission on the details of this option. Consultation: Exposure Draft legislation Public consultation on the transparency measures was sequenced, to assist stakeholders to provide detailed insights on the exposure draft legislation. Public country by country reporting Consultation on exposure draft legislation on public country by country reporting occurred between 6 April and 28 April 2023. Treasury met with a range of stakeholder groups - industry representatives, individual firms, tax advisory firms - across all sectors. Treasury 57

Impact Analysis for Schedule 1 received 55 submissions on the exposure draft legislation (including some in confidence), and these are available on the Treasury consultation website. Treasury also met with international groups, including the OECD. The dominant focus of stakeholder feedback from the business community was the tax data labels which taxpayers would be required to disclose publicly. Academic and the civil society stakeholders welcomed the disclosure of the proposed tax labels and the role this information will play in enhanced tax transparency outcomes, noting the importance of ensuring data is accessible, searchable, standardised and in a machine-readable format. Corporate stakeholders, including international groups, generally supported the shift to more meaningful tax transparency; however they noted the current reporting landscape, broadly, and their concerns around additional compliance costs. In this light, stakeholders raised issues with four specific tax disclosure labels - related party expenses, effective tax rate calculation, and the listing and valuing of intangible assets - claiming these disclosures went beyond existing regimes and were unnecessary. Their concerns focused principally on confidentiality issues (intangible disclosures), and general compliance imposts claiming that these additional labels were a material departure from the general multilateral consensus on CbC reporting (i.e. the EU Directive and OECD confidential CbC) and would require additional IT systems builds. In this regard, stakeholders framed their views around ensuring global consistency with public CbC regimes, claiming that the EU Directive model would be preferable. Similarly, stakeholders also claimed that the 1 July 2023 commencement should be deferred to align with the EU Directive (which is generally expected to commence from June 2024). Treasury sought to understand the quantitative impact from the additional disclosures, as described by industry, however stakeholders did not provide estimates other than to note that additional staff would be needed to process the data inputs (at least until taxpayer reporting systems were automated). Stakeholders focused qualitatively, including by providing anecdotal insights, for example on valuation and materiality constraints with the intangible asset disclosures. In response to this feedback, the four additional data disclosures - related party expenses, the effective tax rate disclosure and the two intangible assets disclosures - were removed from the proposed option. Additionally, the application of the public CbC measure was proposed to be deferred by 12 months, to apply from 1 July 2024. These amendments were suggested to balance the policy intent needs of ensuring public tax disclosures do not undermine the competitiveness of Australian based operations or detract from Australia's ability to attract foreign capital investment and investment while still providing a comprehensive and forward leading public disclosure regime of tax information on a country-by-country basis. Following the close of formal consultation, international stakeholders reached out to Treasury to enquire how the disaggregated approach to reporting would operate, noting 58

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 this was a departure from the OECD confidential approach to CbC reporting and that of the EU. Disclosure of subsidiary information Consultation on exposure draft legislation and explanatory material on disclosure of subsidiary information occurred between 16 March 2023 and 13 April 2023. Treasury received six written submissions. The exposure draft legislation reflected stakeholder feedback from the initial consultation paper that having a full list of subsidiaries would provide a more objective mechanism for disclosing information on company tax arrangements, as opposed to disclosing doing business in tax havens. Stakeholder feedback on the draft legislation subsequently focused on minor technical drafting suggestions and areas that would benefit from additional clarification, such as in-scope entities and timing of disclosures. For example, stakeholders sought clarity on terms like 'jurisdictions' versus 'countries', and what the effect of 'true and correct' versus the existing 'true and fair' concept might mean for in-company sign-off on these disclosures. The final legislation made minor changes in line with stakeholder feedback, as appropriate. Government tenderers' disclosure of their country of tax domicile The measure for Government tenderers disclosing their country of tax domicile did not require legislative amendment was not subject to additional public consultation. This measure can be implemented administratively, through an update to the Commonwealth Contracting Suite, ClauseBank and guidance material published on the Department of Finance's website. It is intended to be implemented with negligible compliance burdens and will operate to complement existing tax details required of Australian Government tenderers, such as the Shadow Economy Procurement Connected Policy, without imposing excessive compliance burden on industry. Preferred option and implementation The government's election commitment is the preferred option. The implementation of this option has been informed by consideration of stakeholder feedback, particularly on exposure draft legislation from the business community (as the cohort incurring the direct compliance cost). Accordingly, the proposed implementation design reflects a balance with compliance cost considerations on business, while delivering meaningful 59

Impact Analysis for Schedule 1 improvements in tax transparency (supported by the civil society and community stakeholders). Through public consultation, stakeholders indicated their general support for enhanced tax transparency and broadly accepted the role this information has in instilling community confidence in the Australian tax system. However, business stakeholders noted there needs to be a balanced approach to ensure this increased transparency did not place unnecessary compliance burdens or encroach taxpayer confidentiality/sensitive information. This balance, and recognition of the competing business stakeholder views and civil society feedback, will help to support the implementation of, and taxpayer compliance with, the new disclosures. However it also recognises that meaningful improvements to taxpayer disclosures also gives rise to some broader economic benefits. For example, reduced information asymmetries can support investors to make more informed decisions, assisting efficient capital allocation frameworks. The increased disclosures and better data availability will also support a more informed analysis of corporates' tax affairs, helping to support trust in the tax system which is a focus of the general community. Reflecting these outcomes, the government's election commitments can ensure a meaningful improvement to tax transparency disclosures compared to the status quo option of no changes. A high-level of taxpayer compliance that gives rise to better data will be an indicator of successful implementation of this option. A summary of the proposed design of these options (and in relation to the design proposed in the consultation paper) follows: Public Country by Country Reporting This element applies to entities with an Australian presence that are: • a CBC reporting parent within the meaning provided by section 815- 375 of the Income Tax Assessment Act 1997 and: - if the CBC reporting parent is a company, it is a constitutional corporation; or - if the CBC reporting parent is a trust, each of the trustees is a constitutional corporation; or - if the CBC reporting parent is a partnership, each of the partners is a constitutional corporation. This definition will apply to Australian parent entities and foreign head quartered entities that meet the definition of a CbC reporting entity. The onus to publish the public CbC report will fall on the parent entity, reflecting that the parent entity will have the requisite information needed to comply with the proposed regime. 60

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 The guiding principle on the final legislative parameters was to balance the government's policy intent for meaningful improvements to tax transparency disclosures, while balancing compliance burdens on taxpayers. This had regard for leveraging existing concepts and mechanisms (including existing regimes), where possible. For example, requiring the parent entity to publish the report leverages the existing OECD process (where lodging of the CbC 'master file' rests with the parent entity). The content of the public CbC disclosure reflects the data that entities would generally disclose under an existing reporting regime, such as the existing OECD CbC disclosure requirements, which has general overlaps with the EU Directive (table below refers). Table 1: Summary of Australian public CbC disclosures27 OECD Global EU Australian CBC Reporting public public Initiative CBC CBC 207 Statement on approach to tax X  X  Name of reporting entities in the     CBC reporting group Description of main business     activities Number of employees     Revenue from (unrelated) third   X  parties Revenue from related parties   X  Book value of tangible assets   X  Profit/loss before tax     Income tax paid (cash basis)     27 Treasury data, 2023 61

Impact Analysis for Schedule 1 Income tax accrued (current     year) Reasons for difference between income tax accrued X  X  and tax due Currency used for the report  X X  The CbC tax disclosures are to be based on the entity's audited financial data to help ensure public confidence in the information, leveraging the Global Reporting Initiative (GRI) approach. This supports confidence in the quality of the data and addresses the verifiability issue with existing disclosures. The specific tax label disclosures were refined in response to stakeholder feedback during consultation on exposure draft legislation. Stakeholders raised issues with compliance burdens if 'additional disclosures' (beyond what is required in CbC regimes currently) were required and ensuring a balance between transparency and protecting commercially confident data (See Consultation section, above). The table above reflects this stakeholder feedback. The tax disclosures require that an in-scope entity report on its Australian and global operations. The option does not include a materiality or substance test. These features are intended to support meaningful changes to tax transparency, to support analysis of BEPS. This 'full disaggregated CbC' approach is broader than the EU's approach which generally operates on an aggregate basis (such as with data labels like total revenue numbers and total accumulated earnings) and limits CbC disclosures to entities with operations in EU member states and EU listed non-cooperative jurisdictions, and aggregated reporting for 'rest of world' activity. The EU also exempts 'small' entities from their regime based on an employee and/or turnover test)28. Stakeholders were mindful of this difference, putting forward a preference for the EU Directive (i.e. a CbC reporting parent would only publish Australian tax data), on the basis it would support greater global consistency in public CbC regimes.. Stakeholders noted generally that 'non-alignment' with the EU Directive would increase compliance costs if taxpayers must operate multiple systems. However, MNEs are increasingly adopting the Global Reporting Initiative (a voluntary reporting standing) for other corporate disclosures,29 suggesting that compliance could be minimised if 28 https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2023/04/eu-public-country-by-country- reporting-latest.pdf 29 https://assets.kpmg.com/content/dam/kpmg/se/pdf/komm/2022/Global-Survey-of- Sustainability-Reporting-2022.pdf 62

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 public CbC disclosures are integrated into broader sustainability reporting (covering other environmental, social and governance reporting), reflecting the growing appetite from various stakeholders for enhanced sustainability reporting. While the data disclosures lean more towards the GRI and OECD tax CbC model (which in-scope entities already comply with), the option does adopt elements of the EU approach to public CbC. For example, placing the obligation on the entity to publish the CbC report (by lodging an approved form with the ATO, with the Commissioner facilitating publication on a publicly accessible Australian Government website) and reflecting the same 12-month reporting window after the end of the reporting period. Additionally, where there is optionality on a public CbC data label - such as for multiple definition approaches to calculating employee numbers - the option adopts EU terminology to further reduce compliance burdens. The proposed deferred application by 12 months, to apply from 1 July 2024, also responded to business stakeholder' feedback. While the disaggregated CbC reporting is intended to support meaningful improvements to tax transparency disclosures, there is a recognition that it does depart from the EU and OECD approaches, and that further consultation with industry may be beneficial on this element of the measure (and the measure more broadly). Disclosure of corporate subsidiary information This element applies to Australian public companies (listed and unlisted) and requires that they disclose information on the number of subsidiaries and their domicile (e.g. their country of tax residence and place of incorporation). Of the affected estimated public companies in scope (approximately 8,000), only 471 are defined as large corporate groups (Australian public companies), with a group turnover greater than $250 million. This measure is intended to provide an objective mechanism for disclosing information on a company's tax arrangements (that is, a statement of fact on whether they operate through subsidiaries, and if so, where those subsidiaries are located). The disclosure of this information would subject companies to enhanced scrutiny on their tax structures, with the intent it induces a behavioural change in how companies view their tax obligations (i.e. by simplifying their structures and operating with fewer interposed entities). This disclosure requirement reflects feedback from stakeholders from the initial consultation on the government's original announcement that it would require companies to "disclose to shareholders material tax risk to assist shareholders to better understand their investments and any tax structuring arrangements of the company they are investing in". The Government announcement included, as an example, reference to the proposed global minimum of 15 per cent being progressed through the G20/OECD Two-Pillar solution. 63

Impact Analysis for Schedule 1 Stakeholders raised some issues with this original position, that a requirement to disclose business in low tax jurisdictions would be subjective, and potentially create an unnecessary compliance cost given the separate work in train on OECD Pillar Two Solution that would require similar disclosures. Stakeholders also noted the Pillar Two work is still subject to negotiation and potential exclusions (which would have the effect of excluding certain entities from the requirement to perform comprehensive tax rate calculations). In response to this feedback, the subsidiary disclosure option was implemented instead of the requirement to disclose if an entity is doing business in a low-tax jurisdiction. Requiring government tenderers to disclose their country of tax domicile This element applies to all entities tendering for certain Australian government contracts (worth more than $200,000) to disclose their country of tax domicile (by supplying their ultimate head entity's country of tax residency). This will complement the existing details tenderers are already required to provide (including about their tax affairs) when applying for government contracts (such as entity name, ABN, business address) and serves as another element to improving transparency on entity disclosures Implementation plan Action Timeframe Government Budget announcement October 2022 Public consultation on exposure draft April 2023 legislation and ongoing work with Finance officials (tenderer's disclosure) Treasury consideration of consultation April/May 2023 feedback Bill introduced into Parliament, and June 2023 finalising guidance material with Finance (tenderers) Application date (corporate subsidiary; 1 July 2023 tenderer disclosures) Application date (public CbC reporting) 1 July 2024 Domestic policy maintenance (ongoing) July 2023+ 64

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Evaluation The election commitments scheduled to apply from 1 July 2023 are in line with the Government's election commitment and October 2022-23 Budget announcements. The proposed 1 July 2024 application date for the public CbC reporting regime reflects stakeholder feedback for additional time to adjust to this measure. Subject to the passage of the legislation through the Parliament, Treasury will continue to work closely with the relevant regulators and industry to refine implementation details, as required. This will include regulatory guidance, as necessary, to assist entities with their compliance obligations. Interactions with these amendments will also be considered in the implementation of future measures that form part of the Government's broader plan to ensure multinationals pay their fair share of tax, including the 2023-24 Budget measure 'Implementation of a global minimum tax and a domestic minimum tax'. Treasury will monitor their operation after implementation to detect and address any unintended consequences that may arise, and to ensure the policies are effective and operating as intended. This is consistent with our standard practice, to ensure the laws are operating as intended. This will include regular engagement with stakeholders to better understand whether the practical application of the policy changes has given rise to any unintended consequences. Subject to these considerations, Treasury will assess whether subsequent amendments and/or review of these commitments is required. Treasury will also continue to work closely with the regulators to identify taxpayer behavioural responses including non-compliance. 65

Attachment A - Public CbC reporting - Non-Confidential Submissions received on Exposure Draft Legislation Submitter ACCI ActionAid Ai Group AIA Ashurst Asia Internet Coalition Association of British Insurers Australian Financial Markets Association Australian Retailers Association BAESA BCA BDO BP Business Roundtable Business Roundtable CAANZ Cochlear Communications Alliance Corporate Tax Association Deloitte Deloitte Etica Sgr EY Financial Accountability and Corporate Transparency Coalition Financial Services Council GRI 67

Impact Analysis for Schedule 1 International Chamber of Commerce KPMG Medicines Australia Minerals Council of Australia Mouvement des Entreprises de France National Foreign Trade Council National Taxpayers Union Norges Bank Investment Management Oxfam Australia Pitcher Partners PRI Public Services International Publish What You Pay Australia PwC Richard Murphy SC Johnson and Son Sonic Healthcare SwissHoldings Tax Executives Institute The Tax Institute TJ Holdings TJN-Aus CICTAR joint submission UNSW US Council for International Business Impact analysis timeline Timing Process/action June 2022 Preliminary assessment sent to OIA for comment August 2022 Public consultation on discussion paper First draft of IA sent to OIA for comment September 2022 Revised draft of IA sent to OIA for comment 68

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 October 2022 Measures announced in Budget March/April 2022 Consultation on exposure draft legislation April 2023 Revised draft of IA sent to OIA for comment May 2023 IA sent to OIA for First and then Second Pass Final Assessment 69

Attachment 2: Impact Analysis for Schedule 2 Table of Contents: Introduction/Executive Summary ......................................................... 72 The problem ......................................................................................... 73 Interest limitation .................................................................................. 74 Intangibles ........................................................................................... 75 Case for government action/objective of reform .................................. 76 Interest limitation (thin capitalisation) ................................................... 76 Treasury's stakeholder engagement has sought to take into account all of these considerations to ensure the final measure is effective and operates as intended. Deduction denial (Intangibles) .......................... 76 Policy options....................................................................................... 78 Thin capitalisation (interest limitation) .................................................. 78 Status quo ..................................................................................... 78 Revenue raising election commitment........................................... 78 Intangibles ........................................................................................... 80 Status quo ..................................................................................... 80 Revenue protection election commitment ..................................... 80 Cost benefit analysis/Impact analysis .................................................. 81 Interest limitation .................................................................................. 81 Option 1 - status quo .................................................................... 81 Option 2 - implementation of election commitment ....................... 81 Intangibles ........................................................................................... 87 Option 1 - status quo .................................................................... 87 Option 2 - implementation of election commitment ....................... 87 Consultation plan ................................................................................. 89 71

Attachment 2: Impact Analysis for Schedule 2 Interest limitation .................................................................................. 90 Consultation: discussion paper (August 2022) .............................. 90 Consultation: post-Budget announcement (November 2022)........ 91 Consultation: exposure draft legislation (March 2023) .................. 91 Consultation: post-exposure draft legislation (April 2023) ............. 94 Intangibles ........................................................................................... 94 Consultation: discussion paper (August 2022) .............................. 94 Consultation: exposure draft legislation (March-April 2023) .......... 95 Option selection and implementation ................................................... 96 Interest limitation .................................................................................. 96 Intangibles ........................................................................................... 98 Evaluation ............................................................................................ 99 Appendix ............................................................................................ 101 Submissions received ........................................................................ 101 Discussion paper - public submissions ....................................... 101 Exposure draft consultation - interest limitation .......................... 103 Exposure draft consultation - Intangibles.................................... 105 Impact Analysis timeline .................................................................... 106 Introduction/Executive Summary The Government is seeking to raise revenue by implementing targeted changes to Australia's thin capitalisation rules to limit an entity's interest expenses in line with their taxable earnings before interest, tax, depreciation and amortisation (EBITDA) - in line with OECD/G20 Base erosion and Profit Shifting Project the report on Limiting base erosion involving interest deductions and other financial payments Action 4, 2016 update - and to stop related party borrowings from being deductible for tax purposes under an Australian specific third-party debt test. The Government is also seeking to protect revenue from arrangements that involve intangibles that avoid Australian tax and seek to achieve overall low tax outcomes by denying tax deductions for payments that relate to intangible assets connected with low- or no-tax jurisdictions. 72

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 These policy changes were outlined in the Government's Multinational Tax Integrity Package, announced in the October 2022-23 Budget. The Budget announcements were based on the Government's election commitment to introduce a multinational tax avoidance package to raise revenue, address tax integrity issues, and improve transparency through better public reporting of multinational entities' (MNE) tax information. This impact analysis addresses the Government's tax integrity measures to limit tax deductions for MNEs and forms part of the Government's broad commitment to repair the Budget. There are two integrity measures, as outlined below. Interest limitation (part one) The policy options considered are: • Maintain the status quo by not implementing any changes to Australia's tax laws. • Implement the Government's Multinational Tax Integrity Package, specifically: amend Australia's existing thin capitalisation rules to limit debt deductions for MNEs in line with the OECD's recommended approach under Action 4 of the Base Erosion and Profit Shifting (BEPS) program. Denying deductions for payments related to intangible assets (part two) • Maintain the status quo by not implementing any changes to Australia's tax laws. • Implement the Government's Multinational Tax Integrity Package to introduce a new anti-avoidance rule limiting significant global entities' (SGEs) (entities with global revenue of at least $1 billion) ability to claim tax deductions for payments relating to intangibles connected with low- or no-tax jurisdictions. The recommended option for both integrity measures is to implement the Multinational Tax Integrity Package measures, as both measures are estimated to raise revenue - as opposed to the status quo option in which the benchmark revenue gain is zero - which will contribute to Budget repair. Treasury has undertaken several rounds of consultation, including on Exposure Draft legislation in March and April 2023, which has informed the final legislation. The transparency elements of the MNE tax avoidance package are addressed through a separate regulation impact statement, attached to this submission. The problem At a high level, the problem is about raising revenue and protecting revenue to assist with Budget repair by introducing legislative changes that will limit MNE tax 73

Attachment 2: Impact Analysis for Schedule 2 deductions. The legislative changes announced by the Government were an election commitment and target two of the known tax practices MNEs adopt to lower their tax payable in Australia. The two MNE tax integrity measures announced in the October 2022-23 Budget target entities with cross-border activity. This reflects that MNEs can take advantage of the differences in tax laws between countries to minimise the amount of tax they pay, typically through structures designed to avoid profits, or limit their taxable presence, in a high(er) tax jurisdiction. This includes through adjusting debt amounts within a group and the use of intragroup (related party) borrowings to claim tax relief for interest expenses in certain jurisdictions to maximise their tax benefits - debt is deductible for tax purposes - while depleting tax receipts. In addition, Australia's relatively high corporate tax rate and the increasing prevalence of highly mobile intangible assets (e.g., intellectual property) provide MNEs with incentives, and the opportunity, to structure arrangements to lower their tax in Australia, and shift profits to low- or no-tax jurisdictions to achieve overall lower tax outcomes. If nothing is done - the status quo - MNEs' current structuring arrangements will continue unchanged, giving rise to an ongoing revenue benchmark (i.e., no gain in revenue). The interest limitation change applies principally to MNEs operating in Australia (any inward/outward investor) with at least AUD $2 million in debt deductions on an associate inclusive basis. This is estimated to apply to approximately 2,500 entities. It is estimated to raise $720 million to 2025-26.30 The intangibles anti-avoidance rule applies to any MNE that is a significant global entity (SGE). Broadly, these are entities with global annual revenue of at least $1 billion. As such, the anti-avoidance rule has the potential to impact around 10,000 self-assessed SGEs operating in Australia. Both rules leverage existing thresholds. Interest limitation The OECD31 notes that " ... the use of third party and related party interest is perhaps one of the simplest of the profit-shifting techniques available in international tax planning. The fluidity and fungibility of money makes it a relatively simple exercise to adjust the mix of debt and equity in a controlled entity". 30 Budget, October 2022-23, Budget Measures, Budget Paper No. 2, p. 15-16/196, https://archive.budget.gov.au/2022-23-october/bp2/download/bp2_2022-23.pdf 31 OECD (2017), Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 - 2016 Update: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing Paris, p. 19. http://dx.doi.org/10.1787/9789264268333-en 74

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Generally, there are two approaches to limiting debt-related deductions for tax purposes: either directly, by limiting the amount of interest expenses an entity can claim (e.g., an earnings-based rules), or indirectly, by limiting the amount of debt an entity can use to generate allowable interest deductions (e.g., debt-to-asset rules). Australia's current approach to limiting an entity's debt deductions for tax purposes is the thin capitalisation regime - these rules limit the amount of debt-related deductions that can be claimed, based on its level of debt compared to assets. The current thin capitalisation regime has three tests: a safe harbour debt test; an arm's length debt test, and a worldwide gearing ratio test. These tests are examples of indirect approaches. However, indirect approaches to limiting debt-related deductions do not necessarily address integrity (profit shifting) risks where an excessive rate of interest is applied to a loan. This gives rise to a revenue problem, through lower tax payable on Australian income. Intangibles Royalties paid to foreign residents are subject to a final withholding tax in the hands of the foreign recipient. The Australian entity - the payer - has the administrative responsibility of withholding the tax on behalf of the foreign payee, and the royalty expense can be claimed by the Australian entity payer as an income tax deduction, thus reducing the Australian entity's taxable income. The general applicable withholding tax rate is 30 per cent, but it can be lowered to rates generally of 5 to 15 per cent where the recipient is a resident of a jurisdiction that has a bilateral tax treaty with Australia. Australia's existing tax integrity framework includes a comprehensive range of general and specific anti-avoidance provisions. However, MNEs are still able to explore loopholes, as evidenced via ATO Taxpayer Alerts summarised below. For example, where an Australian resident makes a royalty payment to a related foreign recipient located in a low- or no-tax jurisdiction, the MNE group could still obtain a two-fold unfair tax advantage, by: • reducing the tax liability of the Australian entity (by claiming income tax deductions for the royalties paid), and • having the royalties favourably taxed (or not taxed at all) at the recipient's jurisdiction. In other instances, an Australian entity may be able to avoid the application of withholding tax on royalties by disguising or 'embedding' such royalties within other types of payments (such as payments for tangible goods or services or management fees). These arrangements are able to avoid the application of the royalty definition itself because the entity mischaracterises, 'embeds' or disguises amounts which in substance qualify as royalties into a payment that is not a royalty. These are known as 75

Attachment 2: Impact Analysis for Schedule 2 'embedded royalties'. These arrangements have been raised by the ATO in Taxpayer Alert TA 2018/2 and pose an integrity risk to Australia's tax base.32 Entities may also be able to reduce Australian profits through moving an intangible asset to a low- or no-tax jurisdiction so profits are instead recognised in the low- or no- tax jurisdiction rather than Australia, or the economic activity in Australia associated with an intangible offshore is purposefully mischaracterised. This reduces the Australian taxable profits given either the intangible or the economic activity is no longer associated with Australia. These arrangements have been raised by the ATO in Taxpayer Alert TA 2020/1 and pose an integrity risk to Australia's tax base.33 As indicated from the ATO Taxpayer Alerts, large MNE groups have been observed to take advantage of these arrangements involving intangibles to shift profits to low- or no-tax jurisdictions. The fast growth of the digital economy has exacerbated these practices, with an increasing number of MNEs structuring their ownership of intangibles through low- or no-tax jurisdictions, giving rise to integrity risks to Australia's tax base. Case for government action/objective of reform These integrity issues need to be addressed to reduce continuing risks to Australia's tax base. Raising and protecting revenue is best achieved by strengthening domestic tax laws through legislative changes, which can only be achieved through government intervention. Legislative changes provide taxpayers with greater certainty than other options, such as relying on administrative guidance. Interest limitation (thin capitalisation) The core objective of this policy is to increase revenue (taxes payable) by limiting the amount of debt deductions entities can claim in Australia for tax purposes. The objective is intended to balance raising more revenue against supporting genuine commercial activities and investment in Australia and minimising compliance burdens on industry. The interest limitation rules are complex and the amendments to the income tax laws are technical, which may give rise to genuine unintended consequences (such as transitional or compliance costs being higher than intended). Taxpayers restructuring specifically to undermine the policy intent would detract from the revenue gain. Treasury's stakeholder engagement has sought to take into account all of these considerations to ensure the final measure is effective and operates as intended. 32 https://www.ato.gov.au/law/view/document?DocID=TPA/TA20182/NAT/ATO/00001 33 https://www.ato.gov.au/law/view/document?docid=TPA/TA20201/NAT/ATO/00001 76

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Deduction denial (Intangibles) The core objective of this policy is to expediently protect the integrity of Australia's tax base from arrangements that involve intangibles to shift profits from Australia to low- or no-tax jurisdictions to achieve overall lower tax outcomes. Whilst aiming to address tax integrity issues, the objective of the policy is also to achieve this in a balanced way. This includes considerations around not adversely affecting commercial investments between unrelated parties that are not achieving low tax outcomes, minimising compliance burdens, and simplifying administration. Australia has existing rules in the tax integrity framework that may apply where taxpayers seek to reduce their tax liabilities in connection with transactions involving intangibles. These include the transfer pricing rules (which require cross-border transactions to be arm's length) the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (which cancel tax benefits in a range of circumstances) and the controlled foreign company rules (which attribute certain income parked offshore back to Australia). However, these rules do not specifically target arrangements involving intangibles, and may not be applicable or may not apply expediently to address arrangements that involve intangibles. For example, although the general anti-avoidance rule has broad scope, it can be resource-intensive due to a requirement to consider whether there is a purpose of tax avoidance and it could take an extensive period to apply. OECD negotiations to address the tax challenges arising from digitalisation and globalisation have been ongoing with good progress having been made. In particular, Pillar Two seeks to establish a global minimum tax on large multinationals. It primarily seeks to address the 'race to the bottom' for corporate income tax rates where countries have lowered their corporate income tax rates to attract or retain local investments from multinationals. The implementation of Pillar Two global and domestic minimum taxes would accordingly help to address profit shifting arrangements involving intangibles given it would reduce the prevalence of low- or no-tax jurisdictions. Although a number of countries have announced their implementation of the Pillar Two global and domestic minimum taxes, which signals a global desire for implementation (with more countries understood to follow with their own announcements), there is a period of time by which there remains no targeted rule to address or disincentivise large multinationals from achieving lower tax outcomes through arrangements involving intangibles. This leaves an opportunity for the continued use of arrangements involving intangibles to achieve low tax outcomes and leaves the integrity of the Australian tax base at risk. 77

Attachment 2: Impact Analysis for Schedule 2 Policy options The options are primarily about raising revenue and revenue protection. They have been designed to target deliberate tax minimisation and avoidance activities, while balancing the need to attract and retain foreign capital and investment in Australia, compliance cost considerations for business, and continuing to support genuine commercial activity. Thin capitalisation (interest limitation) This impact analysis considers two options. Status quo This option would involve no legislative changes to Australia's current asset-based thin capitalisation tests. That is, taxpayers would continue their current practices, there would be no increase in revenue and Australia's tax laws would remain out of line with OECD best practice guidance (see below). Revenue raising election commitment This option would align with the OECD's earnings-based interest limitation rule (BEPS Action 4 - 2016 Update) to limit net interest expenses to 30 per cent of profits, using tax EBITDA as the measure of profits, with a carry forward rule for denied deductions. As a revenue raising, tax integrity measure, this option strengthens Australia's tax policy settings to better mitigate against base erosion and profit shifting risks, in line with OECD best practice guidance. This option: • includes a 15-year carry forward rule for denied interest amounts, under the fixed ratio rule • maintains the arm's length debt test but with amendments to disallow deductions for related party debt (renamed as the 'third-party debt test') and • replaces the worldwide gearing (asset-based) ratio test with an earnings-based group ratio rule for in-scope (general) entities (called the 'group ratio test'). Under this option, the earnings-based fixed ratio test will be the default test, with the group ratio and third-party debt tests operating as substitute tests. The carry forward rule is a standard feature of the earnings-based test and most countries with earning- based (EBITDA) regimes have adopted it, albeit with different approaches (time periods). The OECD model provides countries with flexibility on this. 78

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 The amendments to the worldwide gearing test are also in line with the OECD guidance. The earnings-based group ratio rule will be available for entities that are 'naturally' higher geared for commercial purposes at the group level, and who would otherwise be restricted under the EBITDA fixed ratio. The third-party debt test is an Australian specific rule, replacing the existing arm's length debt test, preventing related party debt deductions from being tax deductible. This amendment is in line with the OECD best practice guidance which suggests that if countries retain an arm's length test it should not serve to reduce the effectiveness of the fixed ratio earnings-based rule in addressing base erosion and profit shifting. Disallowing deductions for related party debt, and instead requiring deductions to be based on external commercial lending terms, limits the ability for entities to use debt as a base erosion or profit-shifting arrangement. This is consistent with the revenue raising intent of the Government. However the third-party debt test also reflects the balance in policy approach to support continued investment in Australia (as per the policy objectives above). The design reflects that the earnings-based rules may not work appropriately for asset- heavy sectors with long depreciation periods, such as the infrastructure and property sectors. Through public consultation, property and infrastructure industry representatives shared insights on their third-party funding structures, which informed the final design parameters. This helps to mitigate transitional effects on industry. The interest limitation rules apply to multinational entities operating in Australia, and any inward/outward investor, with at least AUD $2 million in debt deductions (on an associate inclusive basis). This includes approximately 2,500 entities. The Option leverages the existing thin capitalisation thresholds. The earnings-based rules do not apply to financial entities or authorised deposit-taking institutions (ADIs), and ADIs continue to be subject to the existing thin capitalisation regime. The OECD's interest limitation model In 2013, the OECD released a report Addressing Base Erosion and Profit Shifting which led to OECD and G20 countries adopting a 15-point Action Plan to address BEPS in September 2013. Interest limitation was one of the Actions (item 4). In 2015, the OECD published a best practice framework involving interest deductions, which limited the level of deductible interest expense to an entity's earnings. This report was updated in 2016, and it is this 2016 report which anchors the Government's decision. The OECD guidance initiated a global movement towards earnings-based (EBITDA) tests, with the majority of OECD countries having since adopted earnings-based interest limitation rules34. In this regard, the Government's election commitment will bring Australia into line with the rest of the world. 34 Burnett, C.; 2019; Interest deductibility: implementation of BEPS Action 4 and the future of transfer pricing of intragroup finance; http://ssrn.com/abstract=3459350 79

Attachment 2: Impact Analysis for Schedule 2 Intangibles This impact analysis considers two options. Status quo This option would involve no changes to Australia's current legislative framework around deductions for payments relating to intangible assets. That is, large MNE taxpayers would continue to claim an income tax deduction for payments relating to intangibles made to related parties for the exploitation of intangibles connected with low- or no-tax jurisdictions. There would be no increase in revenue. Revenue protection election commitment This option denies deductions for payments made by a SGE to a related party for the exploitation of an intangible asset, where the arrangement leads to income derived in a low- or no-tax jurisdiction. Under this option a low- or no-tax jurisdiction is a jurisdiction with: • a tax rate of less than 15 per cent; or • determined to have a tax preferential patent box regime without sufficient economic substance. As an anti-avoidance rule which aims to protect revenue, this option is specifically targeted towards deterring SGEs from avoiding corporate income tax by structuring their arrangements so that income from exploiting intangible assets is derived in low corporate tax jurisdictions. The option also applies where a payment to exploit an intangible directly or indirectly leads to income derived in a low- or no-tax jurisdiction. This reduces the potential for the option to be circumvented, for example through a payment being made to a high tax jurisdiction. There is a risk that correct information to support the amount subject to a denial may not be provided by the taxpayer. To address this, an increased penalty may be imposed where the amount has not been appropriately characterised. 80

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Cost benefit analysis/Impact analysis Interest limitation Option 1 - status quo Maintaining the status quo would not increase revenue because there would be no increase in debt deductions denied. It would also mean Australia's current approach to interest limitation would continue to be based on a debt-to-asset ratio with no nexus to economic activity. The current rules allow, generally, for a larger quantum of interest deductions - for instance, up to 60 per cent of the value of the entity's assets - than under the earnings-based test. This approach would be inconsistent with the OECD best practice framework, which has seen a generally consistent uptake globally. For example, in the US, interest deductions are limited to the sum of business interest income, 30 per cent of adjusted taxable income, and floor plan financing interest.35 Similarly, in the UK36 and Canada37, interest deductions are limited to either 30 per cent of tax EBITDA or the group's ratio of interest expense to tax EBITDA. Under this option, investment intention effects and any compliance burdens (e.g., general tax compliance, arm's length debt testing) are assumed to be neutral, reflecting no change to tax policy settings. On balance, this option presents no net benefit. It will bring no gain to revenue, limiting the Government's broader fiscal repair intent and with no changes to Australia's interest limitation rules, taxpayers will continue to have incentives to engage in BEPS arrangements. Option 2 - implementation of election commitment Amending Australia's interest limitation rules in line with the OECD best practice framework (30 per cent EBITDA test) will raise revenue, increasing receipts by an estimated $720 million over the four years until 2025-26 compared to the status quo option. The $720 million increase in revenue is a result of the increase in denied debt 35 IRS, 2023, https://www.irs.gov/newsroom/basic-questions-and-answers-about-the-limitation- on-the-deduction-for-business-interest-expense 36 HM Revenue and Customs, 2022, https://www.gov.uk/guidance/corporate-interest-restriction- on-deductions-for-groups 37 Canada, Department of Finance, 2023; https://fin.canada.ca/drleg-apl/2022/ita-lir-1122-n-1- eng.html 81

Attachment 2: Impact Analysis for Schedule 2 deductions. Approximately 2,500 taxpayers are in scope of the new interest limitation rules. Amending Australia's interest limitation rules - ATO receipts ($m)* 2022-23 2023-24 2024-25 2025-26 Receipts - - 370.0 350.0 *Extract: 2022-23 Budget This option supports the Government's Budget repair focus. It ensures an entity's debt- related deductions are directly linked to its economic activity and its taxable income, making the rule reasonably robust against tax planning and BEPS risks. While revenue raising is the primary focus, the option also ensures the tax design of the interest limitation rules balances broader macroeconomic considerations. That is, this option is intended to support the Government's revenue raising intent by ensuring the tax system is better placed to raise the revenue required, while appropriately balancing neutrality and equity considerations against non-revenue and other broader macro- objectives such as continuing to position Australia as an attractive destination for foreign investment. From a tax framework perspective, the option addresses a known tax avoidance arrangement, as identified by the OECD, and brings Australia into line with most OECD countries who have also implemented an earnings-based interest limitation rule. Consistency in international tax standards supports efforts to reduce base erosion and profit shifting arrangements, by reducing variability in approaches which MNEs could exploit. This option would implement the same 30 per cent of tax EBITDA limitation (the fixed ratio rule) as most OECD countries (e.g., EU, US, UK, Canada). While an earnings-based test will directly limit the amount of debt deductions taxpayers can claim to a proportion of their earnings - effectively imposing a cap on the amount of deductions that can be claimed and reducing the amount of debt deductions claimed in Australia - these tests are also intended to be simple to administer relative to the current thin capitalisation rules. This will help to minimise the overall compliance burden on taxpayers. This reflects that the move to an earnings-based rule is based on common commercial concepts (i.e., tax EBITDA) which are well understood by industry. That said, given the earnings-based rules apply across all sectors (except financial/ADI), entities would be expected to incur some transitional adjustments and compliance costs in applying the new rules. This would include education impacts (keeping abreast of the new rules) and potential refinancing or debt restructuring considerations. Treasury sought to test the extent of these impacts as part of the initial public consultation process (see section below), however stakeholders did not quantify the estimated costs and impacts. During subsequent consultation, stakeholders accepted, generally, that the shift to earnings-based rules based on EBITDA concepts, would be a simplification on the 82

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 existing rules however they had concerns with elements of the exposure draft legislation, which they claimed were overly restrictive and would impose transitional and restructuring costs. An example was with the proposed amendment to section 25.90, in which industry asserted would require taxpayers to track and record their sources of debt funding, where the funding has been allocated and in what proportions. Stakeholders indicated this would be significant, as the general industry practice is to fund projects through a common capital allocation pool, as the current rules have not required specific tracing. This feedback was observed from stakeholders across the economy. Stakeholders also outlined that the earnings-based interest limitation rules would be particularly restrictive for the property and infrastructure sectors because these sectors are typically highly leveraged compared to other sectors and experience timing delays from when they acquire debt and pay related expenses (i.e., construction of a property or infrastructure asset) to the flow through of earnings (i.e., sale of the property/asset). Industry representatives claimed that the earnings-based rules would have a disproportionate impact on these sectors, particularly on new construction projects which have specific external funding arrangements. While the third-party debt test is intended to address these issues, stakeholders, particularly within the property and infrastructure sector, indicated that changes to restrict third-party (e.g., bank) debt deductions were broader than anticipated and would likely result in higher capital costs for investment in Australia (or deter inbound investment, including from foreign superannuation/pension funds), which may result in some debt financed projects not proceeding. The third-party debt test was refined in response to this stakeholder feedback, expanding the conditions to accommodate most common financing arrangements. The intended outcome is that property and infrastructure entities can claim third-party debt deductions (such as bank debt), with no links to earnings, subject to satisfying test conditions (a set of restrictions intended to prevent an unlimited quantum of third-party debt replacing the existing related party debt, and to prevent debt dumping into Australia from offshore). This reflects the need to balance tax integrity with genuine commercial investments. The amendments to the third-party debt test recognise the role of external debt in funding real property developments and helps to mitigate any unintended impacts or uncertainty for future investments projects in Australia (including on related government policy, such as supporting investment into the build-to-rent sector), or transitional costs in applying the new rules. The third-party debt is test is specific to Australia, although though most countries have some form of bespoke arrangement for real property industries. For instance, Canada, the UK, and the US all provide some form of special treatment for real property projects. 83

Attachment 2: Impact Analysis for Schedule 2 Businesses impacted The current thin capitalisation regime distinguishes general entities from financial entities and ADIs. The rules also provide a de minimum threshold, such that entities with total debt deductions below the current $2 million de minimis threshold are excluded from the rules. The option applies to general entities that are above the de minimis threshold. Financial entities/ADIs are typically net lenders of interest and present less of an observed base erosion/profit shifting risk. There are approximately 2,500 general entities in scope, across all sectors of the economy: NO. COMPANIES USING THE CURRENT SAFE HARBOUR TEST BY INDUSTRY (2019-20) Agriculture Construction Utilities Finance Manufacturing Services Mining Other Net impact This option is the preferred option. It is estimated to increase revenue by $720 million over the four years until 2025-26, compared to the 'benchmark' under the status quo option (i.e., a zero gain to revenue). The shift to earnings-based rules away from the current asset-based rules will also align Australia with international standards and provide for a relatively robust protection against BEPS activity. The thin capitalisation rules are a specialised area of tax law characterised by taxpayers with access to sophisticated tax advice. The changes under this option are designed to target MNEs with cross-border activity (large businesses), with the majority of affected taxpayers already operating in jurisdictions which have enacted the OECD earnings- based rules. There will be some medium-sized entities affected. Small businesses are expected to be excluded, due to the $2m de minimis exemption. In practice, tax advisory firms are likely to provide their initial advice on the impact of the changes as 84

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 a service to existing clients (which they may not initially charge for) as part of their ongoing client engagement and preparation of client tax information. However, the amendments are estimated to increase the compliance burden on taxpayers in the initial year they come into effect, in the form of one-off costs. As businesses adjust to the new rules, they will likely seek updated tax advice responding to the changed rules for the first applicable income year. Once this initial advice is received, nil ongoing regulatory costs are estimated, as these costs are expected to fall under the business-as-usual costs of the company that they already incur as part of their annual tax management arrangements. This costing has not considered any behavioural response, such as entities restructuring to maximise their debt deductions, and has not been tested with stakeholders - stakeholders did not provide information on regulatory costs in response to questions in consultation processes, in a quantitative manner. The compliance cost assumptions subsequently reflect limited comments that need to be extrapolated to a wider stakeholder base. Estimated compliance costs for businesses subject to the amended thin capitalisation rules Cost per medium- Cost per large Total cost for all sized business ($)38 business ($)39 businesses ($)40 Start-up cost 13,000 30,000 70,118,000 Ongoing 0 0 0 compliance cost per year The compliance burden is mitigated through the design of the earnings-based test. For example: • the use of tax EBITDA is a common commercial concept, well understood within industry. 38 Based on the assumption of 2 tax advisors per firm costing $800/hour for 8 hours. Medium- sized business typically use mid-tier tax advisory firms for tax advice. These firms typically charge slightly less than the leading advisory firms. Therefore, $800/hour has been chosen as the average charge-out rate, based on the average charge-out rate for the leading tax advisory firms (see footnote below). 39 Based on the assumption of 3 tax advisors per firm costing $1000/hour for 10 hours. The blended charge-out rate for specialist tax advice from leading tax advisory firms ranges from $500-$1500/hour depending on the seniority of the consultant. $1000/hour has been chosen as the charge-out rate because it is the mid-point of this range, reflecting that tax advice is typically prepared with input from consultants at a range of seniority levels and hence will be billed at a range of rates. 40 Based on the assumption of an 80:20 split between large and medium sized businesses affected. Charge out rates are not generally published and differ per client (weighted against bulk work, one off request etc). 85

Attachment 2: Impact Analysis for Schedule 2 • the carry forward rule (15 years) will smooth the effects of temporary volatility in earnings, and limit distortions on investment decisions where high up-front capital investment is required before earnings are generated. • allowing for denied debt related deductions to be claimed in a subsequent income year (i.e., amounts that exceed the proposed 30 per cent EBITDA ratio) provides the same general outcome as the status quo, for entities in a negative tax EBITDA phase. Additionally, the third-party debt test is intended to: • support genuine commercial financing arrangements, with no or limited refinancing needed (generally), specifically in the property and infrastructure sectors. • ensure entities can raise external (arm's length) debt finance as appropriate, while preventing the use of related party debt as a profit-shifting arrangement. • simplify compliance by removing the 'standalone entity' notional test, which is required under the current arm's length debt test to prove what a business acting at arm's length would borrow, and what independent commercial lenders would lend to the business. We also anticipate that the move to an earnings-based test could be deregulatory for entities with low asset bases or higher levels of intangibles/internally generated goodwill (such as service-based entities). The current asset-based approach favours asset-based industries (such as the infrastructure and property industries), as it does not recognise 'material assets' such as goodwill, meaning that service-based entities may have been led to use the more compliance-heavy arm's length debt test to access debt deductions. Under the tests proposed in this option, service-based entities will instead be able to claim debt deductions in line with their tax EBITDA, which is a simpler calculation compared to the existing arm's length debt test approach. Additionally, some groups of trusts and other non-consolidated groups may opt to simplify their operating structures in absence of specific excess capacity rules, such as by limiting the number of interposed trusts in their structure. This response could arise by restructuring the trust's debt financing to align the debt with the income earning asset (rather than structuring whereby debt is on-lent through a chain of trusts) to support their debt deductions under the fixed ratio (earnings-based) test, which would also help to increase the transparency of trust structures. Ultimately, the final design parameters seek to balance tax integrity considerations with non-tax considerations, such as continuing to attract and retain foreign capital and investment in Australia, limiting investment distortions, minimising unnecessary compliance costs for business, and continuing to support genuine commercial activity. This includes consideration of broader policy objectives on infrastructure investment, the renewable energy transition, and fostering start-ups/ innovation (see consultation section below). 86

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Intangibles Option 1 - status quo Maintaining the status quo would not protect the revenue base because MNEs will continue to claim an income tax deduction for payments relating to intangibles made to related parties for intangibles connected with low- or no-tax jurisdictions. This approach is also inconsistent with the actions taken by various other jurisdictions to address profit-shifting issues related to intangibles. For example, jurisdictions such as the United States, United Kingdom, Netherlands and Germany have implemented measures to address similar issues. This option presents no net benefit. It will not protect Australia's revenue base or bring any gain to revenue. It limits the Government's broader fiscal repair intent with no changes to Australia's anti-avoidance provisions. Option 2 - implementation of election commitment Denying deductions on payments provides an efficient mechanism to protect revenue, given deductions would be relevant for an Australian taxpayer over which the ATO has better oversight. Where the criteria for the application of the measure are met, the option would deny a deduction for the Australian taxpayer, allowing an increased level of taxable income to remain in Australia, thereby protecting Australia's revenue base. There are around 10,000 tax lodging entities operating in Australia that have self- assessed as having SGE status in their most recent income tax returns, and could therefore be impacted by this option. This option is targeted at SGEs as these are the entities at higher risk of entering into profit-shifting arrangements involving intangibles. Denying a deduction would reduce incentives for these taxpayers to engage in arrangements involving intangibles to reduce their Australian tax and consequently their overall tax outcomes. The option affects industry sectors to the extent their business involves related party payments for the exploitation of an intangible where income is derived in a low- or no- tax jurisdiction. Intangible assets include intellectual property, copyright, access to customer databases, algorithms, licences, trademarks and patents. The option would address arrangements of concern that have been raised publicly by the ATO where arrangements involve income being derived in a low- or no-tax jurisdiction, particularly where an Australian entity may be able to avoid the application of withholding tax on royalties by disguising or 'embedding' such royalties within other types of payments, or where entities have reduced Australian profits through moving an intangible asset to a low- or no-tax jurisdiction so profits are instead recognised in the low- or no-tax jurisdiction rather than Australia, or the 87

Attachment 2: Impact Analysis for Schedule 2 economic activity in Australia associated with an intangible offshore is purposefully mischaracterised. The option would discourage this activity and incentivise appropriate characterisation given the consequence of a deduction being denied and penalties being applied. Stakeholders have noted that denying deductions for payments in relation to intangibles may disincentivise investment in Australia due to increased tax liabilities, increased compliance costs and difficulties in applying the option. These issues are raised in the context of business transactions in Australia involving intangibles potentially incurring higher tax (via a denial of a deduction) or needing to consider the application of the option and update systems accordingly. This option aims to balance these considerations by targeting the option to areas of higher risk by applying to large multinationals and payments between related parties. The option also aims to balance compliance and administration considerations as it provides a simple way to identify a low- or no-tax jurisdiction, such as utilising the headline corporate income tax rate of a jurisdiction. Stakeholders have also noted possible complexities and compliance burdens from a new integrity rule on top of a number of existing integrity rules and upcoming international changes at a global level. The option will complement Australia's existing anti-avoidance provisions by providing an efficient and straight-forward rule to tackle arrangements involving intangibles, and it does not require proof of a tax avoidance purpose. It is recognised that progress is being made on widespread implementation of Pillar Two global and domestic minimum taxes which will help address profit-shifting arrangements involving intangibles. While the widespread implementation of Pillar Two global and domestic minimum taxes occurs, this option complements the objectives of Pillar Two as it would tackle the integrity issues involving intangibles where income is derived in low- or no tax jurisdictions expediently and protect Australia's revenue. In addition, this option would address other integrity concerns not dealt with by Pillar Two, such as those related to 'embedded royalties'. Net impact On balance, the benefits of this option outweigh the costs given the increased protection it will provide to Australia's revenue base. It seeks to fill a gap in the existing antiavoidance legislation to expeditiously address arrangements involving intangibles, and it aims to address tax avoidance arrangements that have been made public by the ATO. 88

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Estimated compliance costs Cost per entity ($) Total cost for all businesses ($)41 Start-up cost 1,973 19,734,900 Ongoing compliance cost 508 5,081,300 per year The impacted population is significant global entities, that is multinational groups with annual global income of $1 billion or more. These taxpayers will face an upfront increase in compliance burdens as they will need to be aware of and become familiar with the option and consider whether the rule applies to them. Taxpayers will also seek advice and update their systems and processes to assist with complying with the rule. Taxpayers who are affected in particular will undertake further work to evaluate and plan in accordance with the rule. On an ongoing basis, taxpayers may need to re-assess implications, maintain records and review the costs and benefits of their arrangements. Despite the likely increase in compliance burdens, this may be somewhat mitigated due to existing integrity rules and reporting mechanisms SGEs are required to follow. For example, there are existing integrity rules that require taxpayers to consider the tax paid on their payments, and the information required for the application of the option could be sourced from the statements and documents already required from SGEs under their corporate and tax reporting obligations (such as transfer pricing documentation and country-by-country reporting). Consultation plan Treasury conducted extensive stakeholder engagement on these policy changes. Public submissions received by Treasury are available on the Treasury consultation website. The general feedback on each measure is summarised below. 41 Based on assumed upfront learning and education costs of $170-$900 per hour, upfront evaluation and planning costs of $900 per hour, and ongoing evaluation, planning and record- keeping costs of $170 per hour. Assumptions made based on advice from an industry expert. 89

Attachment 2: Impact Analysis for Schedule 2 Interest limitation Consultation: discussion paper (August 2022) A discussion paper on the election commitment was released for public consultation, from 5 August to 2 September 2022. Treasury met virtually and in-person with industry representatives from the property, infrastructure and large corporates sectors, individual firms in the infrastructure and funds management industries, tax advisory firms and the academic community. Treasury received 70 submissions (some in confidence) reflecting broad feedback from businesses, industry groups, academics, civil society groups and individuals. These submissions have been published on Treasury's website.42 This preliminary consultation informed the policy design options for the Government's Budget announcement (25 October 2022). Consultation at this stage was important as the Government's stated policy to move to an earnings-based interest limitation rule was a fundamental change to the current tax rules. This provided Treasury an insight into how stakeholders may be affected by the proposed changes, helping to balance the Government's revenue raising and tax integrity intent, while having regard for current industry practice, and implementation considerations to minimise unintended consequences. The main issues raised in this initial consultation included: • Income volatility: industry stakeholders noted the use of an earnings-based test will disadvantage sectors with income volatility, and long-term projects which give rise to earnings in future years. On this basis, some stakeholders requested various concessions ranging from an outright exemption from the fixed ratio rules, various forms of transitional relief, grandfathering of existing arrangements, and specific industry exemptions. • Carry-forward rule: stakeholders almost universally supported a carry forward mechanism to address income volatility issues. Comments primarily focused on denied interest amounts, with some support for additional carry forward of unused capacity to provide further flexibility. Stakeholders generally sought an indefinite carry forward period for denied interest amounts. • External third-party debt test: stakeholder comments were weighted towards retaining the existing arm's length debt test without change or exempting particular sectors from any policy changes. Stakeholders noted the potential adverse effects on investment if genuine debt financing arrangements were restricted - particularly in asset heavy industries such as the real estate and infrastructure sectors - providing various financing examples which were 42 See Government election commitments: Multinational tax integrity and enhanced tax transparency Consultation Paper August 2022, https://treasury.gov.au/sites/default/files/2022- 08/c2022-297736-cp.pdf 90

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 described as common practice in industry and should be accommodated under the measure. Most examples focussed on third-party debt arrangements. • Timing: views on the complexity of the legislative changes required and concerns that a 1 July 2023 start might not allow sufficient time for businesses to adjust to the new rules. Stakeholders sought a deferred commencement and/or transitional arrangements. In response to this feedback, a 15-year carry forward rule was incorporated into the design of the fixed ratio rule, and the modified arm's length debt test was refined to include a narrow conduit financing arrangement targeting certain on-lent (prima facie related party) financing arrangements within the real estate and infrastructure sectors, while still balancing integrity concerns. Consultation: post-Budget announcement (November 2022) Following the October Budget announcement, Treasury met with industry representatives from the property sector and tax advisory firms on behalf of individual entities, to discuss certain technical parameters, including: • The group trust rule and associate entity excess provisions in relation to the fixed ratio test. • The third-party debt test, including examples of debt financing arrangements. • Stakeholders used this consultation to clarify the Budget announcement, particularly around the third-party debt test. Stakeholders passed on further insights on how a third-party debt would be utilised within industry. This further informed the exposure draft legislation. Consultation: exposure draft legislation (March 2023) On 16 March 2023, Treasury released the exposure draft Bill and explanatory memorandum for public consultation for a four-week period ending on 13 April 2023. Treasury met with a range of stakeholder groups - industry representatives, individual firms, tax advisory firms - across all sectors. The dominant focus of this consultation period was an announced integrity change, the proposed amendment to section 25.90 (see below). Treasury received 54 submissions on the exposure draft legislation, including some in confidence. The public submissions will be published on the Treasury consultation website after legislation is introduced. The main themes raised by stakeholders included: • Disallowance of deductions for interest expenses incurred to derive non- assessable non-exempt (NANE) income from certain foreign equity distributions: this amendment (known as the section 25.90 amendment, reflecting section 25.90 of the Income Tax Assessment Act 1997) was proposed 91

Attachment 2: Impact Analysis for Schedule 2 with a revenue raising and tax integrity intent, to ensure that debt (interest) deductions are linked to taxable income, and to address tax planning by creating a nexus between interest deductions and earnings/economic activity in Australia. It had not been signalled to industry in the initial discussions and it attracted a broadly consistent response from the large corporate sector, across all sectors. Stakeholders raised four general issues: - that the proposed amendment went beyond the thin capitalisation provisions. - that not enough time was given for consideration, for what industry asserted was a substantive policy change. Stakeholders indicated the change would have retrospective application by re-introducing tracing and apportionment calculations for existing debt pools - an exercise industry claimed was impractical and not in keeping with general industry capital allocation frameworks (essentially a pool of funds arrangement; a mix of debt and income) - and result in a large compliance burden. - that the change would disadvantage Australian businesses (relative to foreign entities) that fund foreign operations with Australian debt rather than equity or foreign-sourced debt. Stakeholders claimed, generally, that Australian entities source debt domestically to fund overseas operations for reasons of simplicity, efficiency, or their general limited access to foreign capital markets, and that limiting debt deductions for such economic activity would increase the cost of capital and have adverse effects on investment/business growth. - that the government should not proceed with this change (or if it did proceed, that any such change should be prospective, or at least accommodate a form of grandfathering or grace period), or alternatively, progress it as a separate measure independent of the 'core' thin capitalisation to allow for more detailed consideration of the issue. Stakeholder concerns regarding section 25-90 were considered by Government, with the proposed amendment deferred, reflected in its removal from the final legislation, to be considered via a separate process to this interest limitation measure. Targeted debt creation rules were progressed in its place. • Third-party debt test (TPDT): stakeholders (generally from the property and infrastructure sectors) identified limitations with the proposed rule and claimed it would have only limited application, with many common commercial third-party debt arrangements involving conduit entities likely unable to not meet the conditions of the TPDT, specifically in relation to the narrow 'recourse' and 'same terms' requirements imposed on the debt. Stakeholders commented that the rules needed to be expanded to minimise adverse effects on investment, including on investment in renewable energy infrastructure. In response to these concerns, the third-party debt test was adjusted to better accommodate the common financing arrangements presented to Treasury, specifically 92

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 by the real estate and infrastructure sectors. These changes included broadening the access conditions around 'recourse' and 'same terms', while balancing integrity concerns to protect against uneconomic quantum of debt. • Mutual election/associate entity test: stakeholders commented that the proposed threshold test was unpractical and would limit the availability of the third-party debt test because certain entities subject to the perceived low threshold would not have a material level of control over (or in some instances visibility of) the tax affairs of other entities. Stakeholders noted this would give rise to a 'domino effect' bringing ever increasing numbers of entities into the election test. The broad reach of this test was unintended and in response to these issues, the associate entity test threshold was amended in line to introduce a new concept around the obligor group. • Trust grouping rules (and general neutrality with tax consolidated groups): stakeholders noted the draft legislation seemed to be weighted towards accommodating corporate structures and that further consideration was required for trusts and partnerships. This included facilitating excess interest capacity for trust 'groups', to reflect the existing arrangements possible under current law, noting this aligns with the 'natural capacity' of corporate groups. In response to these issues, a number of technical changes were adopted to better accommodate trusts and non-consolidated groups, for example by amending the tax EBITDA calculation. Feedback was considered on the inclusion of an ability to share excess interest capacity within trust groups, but ultimately decided against including this for simplicity and integrity reasons. • Carry forward deductions: stakeholders noted the proposed loss of carry- forward deductions when entities depart from the fixed ratio test - to use either the group ratio test or third-party debt test - was overly restrictive. Similarly, stakeholders noted that reliance on the (modified) continuity of ownership test, with no option to use the same business test, could result in forgone carry- forward deductions in what industry described as general acquisition scenarios and for start-ups which change ownership. In response to this feedback, the business continuity test was introduced as an alternate requirement to access carry-forward deductions, to better accommodate acquisition arrangements. • Definitional clarity: stakeholders requested further clarity on the definitions of debt deduction and net debt deduction, noting that the concept of debt deduction was broadened without a commensurate approach to interest income. The tax EBITDA calculation, specifically the 'depreciation' element, was claimed by many stakeholders to be overly narrow. In response, the definitions of debt deduction and net debt deduction were revised to be better aligned and the depreciation component of the tax EBITDA calculation was broadened to more closely align with the existing provisions in the income tax law. 93

Attachment 2: Impact Analysis for Schedule 2 Consultation: post-exposure draft legislation (April 2023) Treasury continued to meet with industry representatives after the public consultation period ended, mostly in relation to the third-party debt test and trust grouping rules. These bilateral meetings provided a further opportunity for stakeholders to discuss in specific detail the technical elements of their submissions and to discuss the proposed drafting approach. Stakeholder feedback in these meetings were considered and, where appropriate, reflected in the final design (as indicated above) to improve the functionality and operability of the legislation, with a view to minimising unintended consequences. This included targeted, in-confidence consultations on revised draft legislation. Intangibles Consultation: discussion paper (August 2022) Under the same discussion paper as outlined above, public consultation occurred on the election commitment, from 5 August to 2 September 2022. Treasury received 70 submissions on the discussion paper (some in confidence) reflecting broad feedback from the MNEs and professional services advisors. These submissions have been published on Treasury's website.43 This preliminary consultation informed the policy design options for the Government's Budget announcement (25 October 2022).44 This provided insight into how stakeholders may be affected by the proposed changes, helping to balance the Government's tax integrity intent, while having regard for current industry practice, and implementation considerations to minimise unintended consequences. The main issues raised in this initial consultation included: • Taxpayers in scope, including seeking views on whether the measure should apply to SGEs or be broader than SGEs. • The payments that should be in scope of the measure. • Whether the measure should apply to related and unrelated parties. • The threshold for insufficient tax, canvassing options including: the hybrid mismatch targeted integrity rule (payments made to jurisdictions where they are 43 See Government election commitments: Multinational tax integrity and enhanced tax transparency Consultation Paper August 2022, https://treasury.gov.au/sites/default/files/2022- 08/c2022-297736-cp.pdf 44 Budget, October 2022-23, Budget Measures, Budget Paper No:2, p.16/196, https://archive.budget.gov.au/2022-23-october/bp2/download/bp2_2022-23.pdf 94

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 taxed at a rate of 10 per cent or less), the Pillar Two global minimum tax rate (an effective tax rate of less than 15 per cent), a sufficient foreign tax test (payments made to jurisdictions with broadly a corporate tax rate of less than 24 per cent), an intellectual property tax-preferential regime (payments made to jurisdictions with an intellectual property tax-tax preferential regime), and low or nominal tax jurisdiction lists (payments made to jurisdictions listed on low or nominal tax jurisdiction lists published by international organisations). Stakeholder views were as follows: • Stakeholders noted the need for the measure to be designed in a way that limits impact on commercial arrangements, and avoids disincentivising business investment in Australia. In addition, stakeholders expressed the view that the measure should be designed in a way that limits complexity and compliance costs. • Stakeholders also noted the importance of ensuring consistency with the multilateral OECD Two Pillars work. • Most stakeholders thought that the measure should be limited to SGEs and related parties. • Some stakeholders preferred the criteria to be based on a specific tax rate rather than a list identifying low tax jurisdictions. Stakeholders generally preferred the insufficient tax threshold being 10 per cent under the hybrid mismatch rules, or a prescribed rate under the OECD digital work such as the 9 per cent Subject to tax rule rate or the 15 per cent global minimum tax rate. Other stakeholders preferred a 24 per cent rate. • Some stakeholders suggested carve-outs, such as industry carve-outs for R&D and manufacturing. Some also suggested the measure should not apply in respect of jurisdictions covered by a tax treaty. A review of the submissions informed the Government's decision on policy parameters, as announced in the October 2022-23 Budget. Throughout the process, Treasury worked closely with the ATO to identify and minimise likely implementation issues and unintended consequences. Consultation: exposure draft legislation (March-April 2023) Public consultation was undertaken on exposure draft legislation and accompanying explanatory material for four weeks over 31 March 2023 to 28 April 2023. 28 submissions were received (three were confidential). Stakeholder views were as follows: • Stakeholders noted potential economic double taxation or excessive taxation and unintended economic consequences, particularly where taxes such as subnational 95

Attachment 2: Impact Analysis for Schedule 2 taxes, foreign and Australian controlled foreign company taxes and royalty withholding taxes were not factored into the calculation to identify a low- or no- tax jurisdiction, and noted the increases in penalties. • Stakeholders raised technical issues with the calculation for a federal headline corporate tax rate. • Stakeholders queried interactions between the exposure draft legislation and the OECD Pillar Two global minimum tax and domestic minimum tax. • Stakeholders noted compliance burdens. • Stakeholders suggested carve-outs, such as a tax avoidance purpose test, a substance-based carve-out and an incidental use carve-out. • Stakeholders sought further guidance and examples on the application of the legislation. Treasury also met with industry representatives during the public consultation period, and after the public consultation period ended. These bilateral meetings provided a further opportunity for stakeholders to discuss in specific detail the technical elements of their submissions. The Government will further consider stakeholder feedback received. The interactions between the intangibles legislation and Pillar Two global and domestic minimum taxes will be considered during Australia's implementation of its global and domestic minimum taxes. Information on this was made public in the context of the 2023-24 Budget when Australia's implementation of a global and domestic minimum tax was announced. To provide stakeholders with further guidance, the ATO intends to issue guidance materials to assist taxpayers, after the legislation has passed Parliament. Option selection and implementation The preferred option is to implement the Government's revenue raising and protection election commitments. The interest limitation measure is estimated to result in a gain to receipts of $720 million over the four years to 2025-26 and will strengthen the integrity of Australia's tax system, whilst still allowing genuine commercial activity and investment in Australia to continue. This contrasts with the option of continuing the status quo, which will raise no additional revenue and will continue to allow BEPS activity through the use of debt deductions and intangibles arrangements. Interest limitation The option to implement the Government's revenue raising election commitment is the preferred option. It has been refined to address stakeholder feedback on earnings 96

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 volatility concerns, investment intention impacts and general taxpayer/project financing certainty, while still achieving the Government's policy intent of raising revenue. At a broad framework level, the group ratio test and third-party debt test operate as substitute tests will help minimise transitional issues from the shift to an earnings- based test away from as asset-based test. The carry forward rule for denied deductions provides flexibility for entities and responds to income volatility concerns; the 15-year period (as opposed to an indefinite period) balances the Government's revenue focus. The earnings-based group ratio will provide some additional flexibility for entities with naturally higher debt levels, by allowing them to exceed the 30 per cent EBITDA ratio (up to their group level). The third-party debt test is an Australian specific feature. Limiting the third-party debt test to disallow debt deductions for related debt also balances the Government's revenue focus with ensuring genuine commercial arrangements (for higher geared entities) can continue to support investment intentions. At a technical level, the calculation of tax EBITDA was clarified and broadened to accommodate a broader range of depreciation activities - this was in response to stakeholder feedback that the exposure draft parameter was too limiting. To prevent the duplication of EBITDA capacity between associate entities (an integrity measure), franked distributions and dividends have also been excluded from the calculation of an entity's tax EBITDA, and beneficiaries of a trust and partners in a partnership will need to adjust their tax EBITDA calculation, which some stakeholders suggested. The parameters of the third-party debt test have also been refined in response to stakeholder feedback - the operation and application of this test attracted most interest from industry. The third-party debt test was expanded to better align with commercial practice by broadening the recourse and same terms requirements to support additional capacity within the test, including for development assets, such as for large scale construction. The mutual election obligation was limited to only the associate entities (of the relevant entity) in the obligor group (a common commercial concept). This removed the unintended consequence of requiring a wide range of unrelated entities to elect to apply the third-party debt test. Stakeholder concerns regarding section 25-90 were considered by Government, with the proposed amendment deferred, reflected in its removal from the final legislation, to be considered via a separate process to this interest limitation measure. The new interest limitation rules were announced to commence from 1 July 2023. The ATO will be responsible for administering this measure in line with their standard practice. The ATO's public advice and guidance will assist with implementation and industry certainty. Treasury has worked closely with the Australian Taxation Office and a broad range of industry stakeholders as part of the implementation and legislative design process, to minimise unintended consequences. However, the changes to the interest limitation 97

Attachment 2: Impact Analysis for Schedule 2 rules are a very complex undertaking with broad application in the taxpayer community. There are potential risks for unintended consequences which may only come to light as taxpayers seek to apply the new rules. Treasury will continue to engage stakeholders on the operation of this measure to ensure the rules (and the income tax laws more broadly) are operating as intended. Implementation plan Action Timeframe Government announcement October 2022 Public consultation on exposure draft March/April 2023 legislation Treasury consideration of consultation April/May 2023 feedback Government introduction of Bill into June 2023 Parliament Policy start date 1 July 2023 Tax system maintenance (ongoing) July 2023+ The ATO intends to issue guidance material to assist taxpayers, after legislation has passed the Parliament. Intangibles The option is the preferred option as it addresses the issue of profit shifting through arrangements involving intangibles connected with low- or no-tax jurisdictions, particularly tax avoidance issues already publicly raised by the ATO. The option complements the OECD's work to address the tax challenges of digitalisation and globalisation, particularly given it also addresses base erosion and profit shifting risks. It also addresses other integrity concerns not dealt with by Pillar Two, such as those related to 'embedded royalties'. The option prevents tax avoidance as it covers arrangements intended to minimise income tax (through a combination of shifting profits via a low- or no-tax jurisdiction while claiming a corresponding royalty deduction in Australia). Finally, the option's anti-avoidance character also helps ensure consistency with Australia's bilateral tax treaties as anti-avoidance rules can continue to apply. The option applies to payments made from 1 July 2023. 98

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Treasury has worked closely with the ATO and a broad range of industry stakeholders as part of the implementation and legislative design process to minimise unintended consequences and to achieve an appropriate balance between ease of compliance and administrability. The Government will further consider stakeholder feedback received on the option. Implementation plan Action Timeframe Government announcement October 2022 Public consultation on exposure draft March/April 2023 legislation Treasury consideration of consultation April/May 2023 feedback Policy start date 1 July 2023 Tax system maintenance (ongoing) July 2023+ The ATO intends to issue guidance materials to assist taxpayers, after the legislation has passed Parliament. Evaluation The preferred options (implementation of the interest limitation and intangibles election commitments) are scheduled to commence from 1 July 2023, in line with the Government's election commitment and Budget announcement. While the preferred options reflect the best means of implementing the Government's election commitments, taking into account stakeholder feedback and broader policy framework issues, the measures are complex and the amendments to the income tax laws are technical. As such, while there is no formal review of these policies planned, Treasury and the ATO will monitor their operation after implementation to detect and address any unintended consequences that may arise, and to ensure the policies are effective and operating as intended. Interest limitation Consistent with standard practice, after implementation Treasury will continue to ensure the income tax laws are operating as intended and achieving the previously stated objectives and success metrics (see objectives section). This will include regular engagement with stakeholders to better understand whether the practical application of 99

Attachment 2: Impact Analysis for Schedule 2 the policy changes has given rise to any unintended consequences and/or compliance costs, particularly those that may impact investment behaviour towards Australia. Subject to these considerations, Treasury will assess whether a subsequent technical amendment process and/or review is required. Treasury will also continue to work closely with the ATO to calculate revenue raised as a result of the changes and to identify taxpayer behavioural responses which may give rise to ongoing revenue risks. Subject to this, further integrity measures may be developed and implemented to adjust or supplement the new interest limitation rules. Intangibles Consistent with standard practice, after implementation, Treasury will continue to ensure the income tax laws are operating as intended. This will include regular engagement with stakeholders to better understand whether the practical application of the policy changes has given rise to any unintended consequences. Treasury will also continue to work closely with the ATO to assess any impacts. Effectiveness of the measure will also be evaluated based on ATO insights on taxpayer behaviour in relation to the use of intangibles in achieving low tax outcomes. With the implementation of a 15 per cent global minimum tax and domestic minimum tax in Australia, with the first rules applying from 1 January 2024, interactions with the intangibles option will be further considered and reviewed during the implementation of the global and domestic minimum taxes. Further stakeholder engagement will also be undertaken on any issues. 100

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 Appendix Submissions received Discussion paper - public submissions AMERICAN CHAMBER OF COMMERCE IN AUSTRALIA ANDERSON, CHRIS ASHURST ASSOCIATION OF SUPERANNUATION FUNDS OF AUSTRALIA AUSTRALIAN BANKING ASSOCIATION AUSTRALIAN COUNCIL OF TRADE UNIONS AUSTRALIAN FINANCIAL MARKETS ASSOCIATION AUSTRALIAN NURSING AND MIDWIFERY FEDERATION AUSTRALIAN PETROLEUM PRODUCTS AND EXPLORATION ASSOCIATION LIMITED AUSTRALIAN RETAILERS ASSOCIATION AUSTRALIAN SUPER BDO SERVICES BUSINESS COUNCIL OF AUSTRALIA CHARTERED ACCOUNTANTS AUSTRALIA AND NEW ZEALAND CLIMATE ENERGY FINANCE COCHLEAR COMMUNITY AND PUBLIC SECTOR UNION CORPORATE TAX ASSOCIATION CPA AUSTRALIA DELOITTE ETHICAL PARTNERS FUNDS MANAGEMENT EY FACT COALITION FEDERAL CHAMBER OF AUTOMOTIVE INDUSTRIES 101

Attachment 2: Impact Analysis for Schedule 2 FINANCIAL SERVICES COUNCIL GLOBAL REPORTING INITIATIVE GUTHRIE, PROF JAMES AND LUCAS, DR ADAM INFRASTRUCTURE PARTNERSHIPS AUSTRALIA - SUBMISSION 1 INFRASTRUCTURE PARTNERSHIPS AUSTRALIA - SUBMISSION 2 INSURANCE AUSTRALIA GROUP INSURANCE COUNCIL OF AUSTRALIA KPMG LAW COUNCIL OF AUSTRALIA LENZO, JOE MARITIME UNION OF AUSTRALIA META MINERALS COUNCIL OF AUSTRALIA MINING AND ENERGY UNION NATIONAL FOREIGN TRADE COUNCIL NORGES BANK INVESTMENT MANAGEMENT OMERS AND CDPQ PENSIONERS AND INVESTMENT RESEARCH CONSULTANTS PITCHER PARTNERS PRINCIPLES FOR RESPONSIBLE INVESTMENT PRIVATE HEALTHCARE AUSTRALIA PROPERTY COUNCIL OF AUSTRALIA PUBLIC SERVICES INTERNATIONAL AND THE INTERNATIONAL TRADE UNION CONFEDERATION PUBLISH WHAT YOU PAY AUSTRALIA PWC RESMED SADIQ, PROF KERRIE SILICON VALLEY TAX DIRECTORS TATE, JACQUI TAX JUSTICE NETWORK AUSTRALIA - CENTRE FOR INTERNATIONAL CORPORATE TAX ACCOUNTABILITY AND RESEARCH JOINT SUBMISSION 102

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 TECHNOLOGYONE THE AUSTRALIA INSTITUTE THE LAW SOCIETY OF NSW THE TAX INSTITUTE VBDO TAX TRANSPARENCY BENCHMARK 2021 WATSON, TONY Exposure draft consultation - interest limitation ALLENS ASHURST ASSOCIATION OF SUPER FUNDS OF AUSTRALIA AUSTRALIAN BANKING ASSOCIATION AUSTRALIAN FOREST PRODUCTS ASSOCIATION AUSTRALIAN INVESTMENT COUNCIL AUSTRALIAN SUPER BDO BOARD OF TAXATION CANADA PENSION PLAN INVESTMENT BOARD CARSALES.COM CHARTERED ACCOUNTANTS AUSTRALIA AND NEW ZEALAND COMPUTERSHARE CORPORATE TAX ASSOCIATION CPA AUSTRALIA CSL DELOITTE EY FINANCIAL SERVICES COUNCIL GILBERT + TOBIN GRANT THORNTON HANCOCK VICTORIAN PLANTATIONS HOLDINGS PTY LIMITED IFM INVESTORS 103

Attachment 2: Impact Analysis for Schedule 2 IMDEX INFRASTRUCTURE PARTNERSHIPS AUSTRALIA INPEX INSURANCE AUSTRALIA GROUP LIMITED KPMG LAW COUNCIL OF AUSTRALIA ONTARIO MUNICIPAL EMPLOYEES' RETIREMENT SYSTEM, CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC, BRITISH COLUMBIA INVESTMENT MANAGEMENT CORPORATION, AND THE ONTARIO TEACHERS' PENSION PLAN ORICA PERPETUAL PITCHER PARTNERS PROPERTY COUNCIL OF AUSTRALIA PUBLIC SECTOR PENSION INVESTMENT BOARD, GUARDIANS OF NEW ZEALAND SUPERANNUATION FUND PWC QBE QIC REA GROUP LIMITED SEEK SERENITAS SHELL SONIC TASMAN TOURISM TRUST TAX JUSTICE NETWORK AUSTRALIA, CENTRE FOR INTERNATIONAL CORPORATE TAX ACCOUNTABILITY AND RESEARCH TELSTRA THE AUSTRALIAN FINANCE INDUSTRY ASSOCIATION THE AUSTRALIAN FINANCIAL MARKETS ASSOCIATION THE AUSTRALIAN PETROLEUM PRODUCTION & EXPLORATION ASSOCIATION THE AUSTRALIAN SECURITISATION FORUM 104

Treasury Laws Amendment (Making Multinationals Pay Their Fair Share--Integrity and Transparency) Bill 2023 THE COUNCIL OF AUSTRALIAN LIFE INSURERS THE TAX INSTITUTE THE TECH COUNCIL OF AUSTRALIA TRANSGRID Exposure draft consultation - Intangibles AMERICAN CHAMBER OF COMMERCE IN AUSTRALIA ASHURST AUSTRALIAN RETAILERS ASSOCIATION BDO BUSINESS COUNCIL OF AUSTRALIA CHARTERED ACCOUNTANTS AUSTRALIA AND NEW ZEALAND COCHLEAR LIMITED CORPORATE TAX ASSOCIATION CSL LIMITED DELOITTE ERNST & YOUNG INFORMATION TECHNOLOGY INDUSTRY COUNCIL KPMG LAW COUNCIL OF AUSTRALIA MEDICINES AUSTRALIA NATIONAL FOREIGN TRADE COUNCIL NESTLÉ AUSTRALIA LTD PITCHER PARTNERS PWC RESMED RSM AUSTRALIA SWISSHOLDINGS TAX EXECUTIVES INSTITUTE TAX JUSTICE NETWORK AND THE CENTRE FOR INTERNATIONAL CORPORATE TAX ACCOUNTABILITY AND RESEARCH 105

Attachment 2: Impact Analysis for Schedule 2 THE TAX INSTITUTE Impact Analysis timeline Timing Process/action July 2022 Measure assessed by OIA as having a minor regulatory impact August 2022 Public consultation on discussion paper First draft of IA sent to OIA for comment September 2022 Revised draft of IA sent to OIA for comment October 2022 Measures announced in Budget March/April 2022 Consultation on exposure draft legislation April 2023 Revised draft of IA sent to OIA for comment May 2023 IA sent to OIA for First and then Second Pass Final Assessment 106

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